Autumn Statement 2016: VAT and Indirect Tax

This year’s Autumn Statement produced few surprises, although there was an anti-abuse measure in respect of the VAT flat rate scheme and a fairly significant increase to Insurance Premium Tax.

VAT flat rate scheme

From 1 April 2017 there will be a new (higher) VAT flat rate of 16.5% for “businesses with limited costs”. Currently, businesses determine which flat rate percentage to use by reference to their trade sector. From 1 April 2017, however, they must also determine whether they meet the definition of a limited cost trader, which will be one whose costs of goods is one of the following: zero, less than 2% of turnover; or less than £1,000 per year.

KS comment: The main category of traders that will be hit by the changes is those in professional services, including computer consultants, lawyers, architects and so on, whose current rate is 14.5%. Such a business turning over £120,000 will have an additional VAT cost of £2,400 per year, up from £17,400 to £19,800. Some of those affected will consider leaving the flat rate scheme and accounting for VAT conventionally, which may have been HMRC’s intention.

Increase in Insurance Premium Tax

From 1 June 2017 the rate of IPT will increase from 10% to 12%. This follows an increase from 9.5% to 10% from 1 October 2016.

KS comment: The current rate of IPT is relatively low on an international scale, although this increase will reduce the gap. The Government states that this will raise an additional £855m by 2021/2022, and whilst the Chancellor appears to expect this to be offset by reductions in car insurance premiums, those who pay significant amounts of other types of insurance could face large additional costs.