Vat schemeTackling Aggressive abuse of the VAT FLAT RATE SCHEME


Aggressive abuse of the Vat Flat Rate scheme!

In today’s Autumn Statement the Chancellor published a guidance document which announced a major change to the VAT Flat Rate Scheme.  The reason for this is to ‘tackle aggressive abuse of the VAT Flat Rate Scheme’.

From 1st April 2017 it is proposed that there will be a new 16.5% VAT flat rate.  It will be specifically for those businesses who have very few costs, i.e. consultants and contractors (but not just limited to these though).

This is designed to STOP those businesses who spend next to nothing AND who make a good ‘profit’ simply by being VAT registered on this scheme. Therefore in the eyes of the government and HMRC it is yet another aggressive avoidance measure and such they feel they need to “Shut this aggressive abuse of the Vat Flat Scheme down!”

To avoid having to use this new 16.5% rate a business will have to pass a couple of tests.

The main one is that its VAT inclusive expenditure on goods is less than 2% of their VAT inclusive turnover in a prescribed accounting period.

In working this out the following goods are specifically EXCLUDED in order to stop businesses inflating their costs beyond 2%.

These costs are:-

  • capital expenditure
  • food/drink for consumption by the business (or its employees)
  • vehicles, vehicle parts and fuel (unless the business is one that carries out transport services (e.g. a taxi business) AND uses its own/leased vehicles to carry out those services)

This means a business with a turnover of £100,000 would be forced to use the new 16.5% rate if the cost of goods bought by a business (excluding those costs listed above) is less than £2,400.

Please be aware that the guidance document specifically states ‘cost of goods bought’.  This suggests that the cost of services bought are also excluded. If this is the case then many more businesses are likely to be adversely affected by this change.

Those businesses that have to apply the new 16% rate will see their profits and cashflow fall.

All businesses on the Flat Rate Scheme will have to take extra care about the rate they use.  If not HMRC could hit them with a retrospective tax bill and penalties!

Finally, this is the first draft of what is proposed and we will have a clearer understanding early next month of what is going to happen when a second draft is issued.

Watch this space!

For more information check out HMRC guidance notes on this:-


This article is for general information only and no action should be taken, or refrained from, as a result of this information. Professional advice should be taken based on specific circumstances in each individual case. Whilst we endeavour to ensure that the information contained in this article is correct, no liability will be accepted by KMA Accountancy for damages of any kind arising from the contents of this communication, or for any action or decision taken as a result of using any such information.

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