VAT FLAT RATE SCHEME CHANGES
The VAT flat rate scheme (“FRS”) is being changed from 1st April, and the changes mean the scheme is going to be unworkable for many small businesses. If you use the FRS, you need to consider going back to standard VAT or deregistering from VAT altogether, if you can do so.
What has changed?
The government considers that there is a “perceived abuse” of FRS, so – unless you buy goods as part of your business - the only flat rate that is going to be permitted is 16.5%. Labour-only contractors have been able to make a “turn” out of the FRS, and HMRC lost a recent tribunal case and that would allow more businesses to use a lower flat rate. The perception is that VAT is now being lost in this area.
With effect from 1 April, “limited cost traders” must use a flat rate of 16.5% irrespective of their type of business.
What is a limited cost trader?
A limited cost trader is 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%
What to do now – i.e. BEFORE 1st April 2017?
If you are affected, there are only two options. If your turnover is less than threshold of £81,000 per annum, then you can deregister. Finally, you should consider leaving the FRS and going back to standard VAT – and you neither make not lose money doing that (provided your return are accurate and filed and paid on time.) Please contact CS Corporate Solutions for advice on deregistration or leaving FRS.