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Tackling aggressive abuse of the VAT Flat Rate Scheme

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23 November 2016

From 1 April 2017 there will be a new 16.5% VAT flat rate percentage for businesses with limited costs (‘limited cost traders’) - this compares with the normal VAT fraction of 20/120, or 16.67%, where a business uses normal VAT accounting and its supplies are all VATable @ 20%. 

Any business currently using the flat rate scheme, or thinking of joining it, will need to decide for each accounting period whether they are a limited cost trader. This is defined as one whose VAT inclusive expenditure on ‘goods’ is either:

  • less than 2% of their VAT inclusive turnover in a prescribed accounting period
  • greater than 2% of their VAT inclusive turnover but less than £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000)

For this purpose, the definition of goods will exclude the following items:

  • capital expenditure
  • food or drink for consumption by the business or its employees
  • vehicles, vehicle parts and fuel (except where the business uses its own or leased vehicles to provide transport services

There will be anti-forestalling provisions to prevent limited cost traders invoicing (or receiving a payment) in advance of 1 April 2017, in order to be able to apply a lower flat rate scheme percentage to a supply of a service which actually takes place after that date.

Power to examine and take account of goods at any place The Government will introduce legislation in Finance Bill 2017 (effective from Royal Assent) to extend the current Customs and Excise powers of inspection. This will enable officers to examine goods away from approved premises, such as airports and ports, to search goods liable for forfeiture and open or unpack any container.

The following measures were all announced in Budget 2016 and will be legislated for in Finance Bill 2017:

  • Updating the VAT Avoidance Disclosure Regime

With effect from 1 September 2017, the regime for disclosure of avoidance of indirect tax will be strengthened. Scheme promoters will be primarily responsible for disclosing schemes to HMRC and the scope of the regime will be extended to include all indirect taxes.

  • A penalty for participating in VAT fraud

From Royal Assent, a new penalty will be applied to businesses and company officers when they knew or should have known that their transactions were connected with VAT fraud. The penalty will be a fixed rate penalty of 30% of the VAT at stake.

  • Implementation of the Fulfilment House Due Diligence Scheme

A new Fulfilment House Due Diligence Scheme will be introduced from April 2018. This will ensure that fulfilment houses play their part in tackling VAT abuse by some overseas businesses selling goods via online marketplaces.

Julian Millinchamp - Indirect Tax Director
Julian Millinchamp
Indirect Tax Director Contact details