The measure is touted as a counter-avoidance measure. Its objective is to reduce the financial benefit of the Flat Rate Scheme in cases where HMRC consider the scheme is being abused.
Unfortunately, the provisions will seemingly impact not only abusive arrangements but also a broad range of legitimate businesses which currently benefit from it.
The measure introduces a new 16.5 per cent flat rate for businesses which meet the definition of a limited cost trader. A limited cost trader is defined as a business whose VAT-inclusive expenditure on goods is either:
- less than 2 per cent of its VAT-inclusive turnover; or
- more than 2 per cent but less than £1,000 per annum.
This is bad news for many small businesses. Not only will this affect those who set out to abusively exploit the scheme but its broad-brush definitions will impact any business which falls foul of the tests. This seems to run counter to the small business facilitation spirit of the scheme.
The provisions will come in from 1 April 2017. Potentially affected businesses will want to assess the financial impact and consider the extent that remaining in the Scheme is likely to offer a continuing benefit.