Tackling aggressive abuse of the VAT Flat Rate Scheme - technical note

Updated 5 December 2016

Purpose of this note

At Autumn Statement on 23 November 2016, the Chancellor of the Exchequer announced the introduction of a new 16.5% VAT flat rate for businesses with limited costs. This will take effect from 1 April 2017. This note provides further details on those affected by the new rate.


The VAT Flat Rate Scheme (FRS) is a simplified accounting scheme for small businesses. Currently businesses determine which flat rate percentage to use by reference to their trade sector. From 1 April 2017, FRS businesses must also determine whether they meet the definition of a limited cost trader, which will be included in new legislation.

Businesses using the scheme, or thinking of joining the scheme, will need to decide whether they are a limited cost trader. For some businesses - for example, those who purchase no goods, or who make significant purchases of goods - this will be obvious. Other businesses will need to complete a simple test, using information they already hold, to work out whether they should use the new 16.5% rate.

Businesses using the FRS will be expected to ensure that, for each accounting period, they use the appropriate flat rate percentage.

What is a limited cost trader?

A limited cost trader will be 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 £1000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000)

Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:

  • capital expenditure
  • food or drink for consumption by the flat rate business or its employees
  • vehicles, vehicle parts and fuel (except where the business is one that carries out transport services - for example a taxi business - and uses its own or a leased vehicle to carry out those services)

These exclusions are part of the test to prevent traders buying either low value everyday items or one off purchases in order to inflate their costs beyond 2%.


Goods must be used exclusively for the purpose of the business - this means that you must not include the cost of any goods that are used in full or in part for your own private use. For example, printer ink and stationery that are used for both your office and your home would not be included. It would also exclude goods acquired with the intention of giving them away or donating them to a third party.

Capital expenditure - is the cost of any goods which are bought to be used in the business over a period of time (for example, longer than a year). Examples include equipment such as a computer, mobile phone, office furniture, a tablet or a printer, even if they are not necessarily treated as capital assets for accounting purposes. The legislation that describes capital expenditure goods can be found in VAT Regulations 1995, 55A (1).

Anti-forestalling provisions

Paying or invoicing in advance to avoid an increase in tax is known as forestalling. Anti-forestalling legislation was published on 23 November 2016 and should be read alongside this guidance. This can be found in sections 8.2 and 9.7 of VAT Notice 733: Flat rate scheme for small businesses. It is designed to prevent any business defined as a limited cost trader from continuing to use a lower flat rate beyond 1 April 2017.

This will affect a business that supplies a service on or after 1 April 2017 but either issues an invoice or receives a payment for that supply before 1 April 2017.

When considering the limited cost trader definition, any such supply must be treated, for VAT purposes, as taking place on 1 April 2017. Any invoice or payment that covers continuous supplies of services that cross this date must be apportioned.

What happens next?

Draft secondary legislation will be published on 5 December 2016 and businesses will have 8 weeks to comment. To support businesses, we will introduce an easy-to-use online tool that will help determine whether they should use the new rate.

We will communicate with affected businesses regularly between now and 1 April 17.

In the interim, if you have any queries, please contact our VAT Helpline on Telephone: 0300 200 3700. Opening hours are Monday to Friday, 8am to 6pm.