Flat rate VAT complications

Many VAT-registered businesses use the flat rate option. It saves time, means less record keeping is needed, and can bring cashflow and overall financial savings.

HMRC have brought in restrictions which make using the flat rate more complicated and generally less favourable for many from April 2017. Where businesses spend less than a certain amount per quarter on particular goods, they will be classed as ‘limited cost traders’, which means that their flat rate for that quarter rises to 16.5%.

Staying in the scheme will therefore involve more record keeping and extra calculations to determine the rate, and becomes financially less attractive to many, especially those who are service providers and whose expenses tend to be on services rather than goods. There will still be advantages for some: anyone in the flat rate scheme should consider during March 2017 whether or not to notify HMRC that they wish to leave it, and prepare VAT returns on the conventional basis, and keep the records needed accordingly.

https://www.gov.uk/government/publications/vat-notice-733-flat-rate-scheme-for-small-businesses/vat-notice-733-flat-rate-scheme-for-small-businesses#section4

https://www.gov.uk/government/publications/vat-notice-733-flat-rate-scheme-for-small-businesses/vat-notice-733-flat-rate-scheme-for-small-businesses#section12