From April 2017 HMRC will be introducing a new flat rate percentage of 16.5% for many the ‘labour only’ businesses, such as contractors will need to apply as opposed to their current percentage. This means any businesses caught by the new rules will pay more VAT than they are currently paying.
Who is Affected by the new rules?
HMRC have defined labour-ony business/limited cost trade as one which spends less than 2% sales on goods (not services) for the period you submit a VAT return (HMRC call this ‘the accounting period’ for VAT only).
When working out the amount spent on goods, it cannot include purchases of:
- capital goods (such as new equipment used in a business)
- food and drink (such as lunches for staff)
- vehicles or parts for vehicles (unless running a vehicle hiring business)
If a firm spends less than £1,000 in their accounting period (if the period was a year), they also count as ‘labour-only’ even if this is more than the 2%. If your accounting period is longer / shorter than 12 months, the £1,000 threshold is pro-rated.
If you are affected by these new rules and would like some advice contact us for a free initial meeting;
Telephone: 01424 211141