Changes to the VAT flat rate scheme

February 13, 2017 | Posted by Sonal Agarwal | Accounting, Business Advice, Taxation, Whitepapers,

VAT flat rate scheme

With effect from April 2017, there will be changes to the VAT flat rate scheme. For each VAT period, all companies on the VAT flat rate scheme (FRS), will be required to assess if they are a limited cost trader.

What is a limited cost trader?

A company whose total expenditure on “goods” purchased is:

  • Less than 2% of gross turnover
  • Less than £1000 per year or £250 per quarterly VAT returns

Two important things to note about this are:

  • All figures, purchases and sales, are inclusive of VAT
  • Goods do not include:
    – Payment for services – for example subcontractors, legal advice, rent
    – Capital expenditure such as computers, cars and office furniture
    – Food and drink for employees
    – Costs on vehicles (not just cars), maintenance and fuel

If you are a limited cost trader, the flat rate applicable will be 16.5%. Flat rate is applied to your gross turnover.

For example:

flat rate VAT scheme

As you can see, almost all VAT collected on sales will need to be deposited with HMRC and you will not be able to reclaim VAT on expenditure if the expenditure is not “goods” as defined above. If this applies to you, we would advise you to either:

  • Deregister from the flat rate scheme, so you can claim VAT on all expenses
  • Deregister from VAT altogether, if your taxable supplies are below the registration threshold of £83,000, and your VAT on purchases is insignificant

Flat rate legislation was introduced to simplify record keeping for small businesses. However, it was susceptible to abuse by companies who did not incur any expenditure on which VAT had been paid. Thus, they would generate surplus every VAT period from the differential VAT rates – collected from customers (20%) and the one at which VAT was deposited to HMRC (Flat rate applicable to their profession).  This latest change will tackle this issue, but will also have a significant effect on businesses in the service sector, for example IT contractors and consultants.

If you would like help determining if the VAT flat rate scheme is right for you, please contact us on 01256 406 601.

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