If the limited cost trader VAT percentage is appropriate to your circumstances, then you should consider the following options:
Deregister for VAT
If your annual VAT taxable turnover falls below the de-registration threshold of £85,000 (from April 2017) and you consider it will remain so going forward, then you are entitled to deregister for VAT.
The downside, of course, is that you lose the ability to claim VAT on any business expenses you incur.
Also if you are dealing with clients who aren’t VAT registered, this may make you more competitive in the market place.
The benefits of this is that it does reduce the administrative burden in your company.
You should consider remaining VAT registered, if you incur VAT on goods and services purchased for use in your business. The benefits of remaining VAT registered are that you are compliant for VAT purposes - there is a mandatory requirement to be registered for VAT if your turnover is above £85,000 (from April 2017).
Being VAT registered also provides assurance to any interested parties that you have a robust accounting framework in place on order to meet your financial responsibilities.
You will continue to charge VAT on the services you provide, however, the amount you pay over to HMRC VAT will be your sales VAT less any VAT on your business expenses.
If a purchase is also for personal or private use, you can only reclaim the business proportion of the VAT.
What are the rules when claiming VAT on your business expenses?
Firstly, the goods or services you purchase must be for business use and the seller must charge VAT on their invoice. If they are not registered for VAT, then there is no VAT for you to claim.
Also, you must retain the original VAT invoice (or an electronic version) in order for you to claim the VAT on any business expenses you incur.
You should also retain your VAT records for at least 6 years. Please note that you can’t reclaim VAT using an invalid invoice, pro-forma invoice, statement or a delivery note.
What constitutes a proper VAT invoice?
For invoices with a value below £250 and provided the supply is not to a person in another EC country a VAT invoice should contain the following information:
- The supplier’s name, address and VAT registration number.
- The time of supply.
- A description which identifies the goods or services supplied.
- The gross amount payable.
- For each rate of VAT chargeable, the gross amount payable including VAT and the VAT rate applicable.
For invoices in excess of £250, VAT invoices must show:
1. An identifying number.
2. Supplier’s name, address and VAT registration number.
3. The time of supply (tax point).
4. Date of issue (if different to the time of supply).
5. Customer’s name (or trading name) and address.
6. The type of supply.
7. A description which identifies the goods or services supplied. For each description you must show:
- The quantity of goods or extent of the services; the charge made, excluding VAT.
- The rate of VAT.
- The total charge made, excluding VAT.
- The rate of any cash discount offered.
- Each rate of VAT charged and the amount of VAT charged at each rate and shown in sterling.
- The total amount of VAT charged, shown in sterling.
What vatable expenses can I claim?
- Leasing a company car. You can usually claim 50% of the VAT.
- VAT on self-drive hire cars if you hire it for no longer than 10 days and it is used only for business.
- Claim all the VAT on buying a commercial vehicle (e.g. van) if used only for business.
- If your company reimburses you for business mileage, then you can claim VAT on fuel element of the mileage payment. If this is a reimbursement for a personally held vehicle the amount of VAT to claim is a proportion of the 0.45p mileage payment.
- If the vehicle is a company car, then you would use the advisory fuel rate applicable to your vehicle, which is dependent on the car’s engine size.
- Other business expenses such as accountancy fees, accommodation costs, laptops, printers, printing and stationery costs, advertising fees, etc.
Example 1- Compare old flat rate of 14.5% with limited cost trader percentage of 16.5%
A business provides Civil Engineering services with a business turnover of £60,000 per annum. Accommodation costs are £4,000 + Vat per annum and are not reimbursed by the business’ clients. Accountancy fees are £1,500 + VAT per annum.
VAT inclusive turnover £60,000 + VAT £12,000 = £72,000.
Currently, under the flat rate scheme, with a rate of 14.5%, the VAT payable would be 14.5% x VAT inclusive turnover £72,000 = £10,440.00. The saving under the flat rate scheme is £12,000 - £10,440 = £1560.00.
Under the new limited cost trader rate from 1st April 2017, with a rate of 16.5%, the VAT payable would be 16.5% x VAT inclusive turnover £72,000 = £11,880. The saving under the flat rate scheme is £120.00.
There is a first year 1% allowance reducing the rate to 15.5% increasing the saving to £840 in the first year of VAT registration.
Any saving will be treated as income in the business with the appropriate tax applied to any profit arising from the savings.
Therefore, if you are currently in the Flat Rate VAT scheme, from 1st April 2017, the scheme becomes far less attractive.
Example 2- The Standard rate option
In the above example, the company also incurred VAT inclusive purchases (£4,000 + £1,500) + VAT £1,100.00 = £6,600.00.
The expenses related to accommodation costs and accountancy fees of £4,000 and £1,500, excluding VAT, respectively.
Under standard rate VAT the amount of VAT payable would be £12,000 -£1,100 = £10,900.
If we compare, the flat rate saving on the 14.5% flat rate and the standard rate vat claimed on expenses, then the flat rate VAT saving is more beneficial by £460.00.
However, with the changes planned in April 2017, claiming VAT under the standard rate VAT scheme becomes more attractive rather than the new rate of 16.5% by £980.00.
Assuming there are no changes to the planned legislation following the consultation period, where you currently benefit from the flat rate VAT scheme, going forward, a move to the standard rate VAT scheme would be beneficial.
However, evidence of VAT expenditure is a crucial requirement to benefit from the standard rate scheme.