Proposed changes to the VAT flat rate scheme and the increased combating of abuse of the scheme could negatively impact compliant smaller businesses, according to the Chartered Institute of Taxation (CIOT).

Changes to the scheme were announced in Autumn Statement 2016 for ‘limited cost traders’ – businesses which have a very low cost base.

From 1 April 2017, firms using the scheme during the accounting period will need to pay an increase rate of 16.5%.

The changes are being brought in to tackle what HMRC believes to be widespread abuse of the scheme.

CIOT believes that more than 4,000 businesses could move back into standard VAT accounting to avoid this new rate, resulting in higher costs in the long term.

Under the scheme:

• You pay a fixed percentage of your VAT inclusive turnover to HMRC
• You keep the difference between what you charge your customers and pay to HMRC
• You can’t reclaim VAT on your purchases, excluding certain capital assets over £2,000.

Peter Dylewski, chairman of the CIOT’s indirect taxes sub-committee, said:

“HMRC will face difficulties building in effective anti-tax avoidance measures, to prevent traders side-stepping the new measure, for instance by buying and selling small amounts of goods to take them over the limited cost trader thresholds.

”One of the main challenges will be for businesses to understand whether they have acquired goods or services, which is often unclear for expenses such as computer software, electricity and gas and professional subscriptions.”

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