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VAT Flat Rate Scheme Changes

Sue Lucas

April 2017 sees changes to the VAT flat rate scheme, which may have a detrimental impact on certain small businesses.


The VAT flat rate scheme has been an attractive option for many smaller businesses as it simplifies the application of the VAT regime, allowing the trader to focus on growing the business.  However there are instances where the application of the Flat Rate Scheme has resulted in VAT savings for the business - something HMRC wants to prevent.


In the 2016 Autumn Statement, the Chancellor announced that a new 16.5% rate will be introduced for businesses with limited costs, such as many labour-only businesses. The new rate comes into effect from 1 April 2017.  A ‘limited cost trader’ is defined as one that spends less than 2% of its VAT inclusive turnover on goods in an accounting period. A firm will also be defined as a limited cost trader if its expenditure on goods is greater than 2% of its VAT inclusive turnover but less than £1,000 a year. In practice, this might apply to labour-intensive businesses such as IT contractors and consultants.


The rules state that goods must be used exclusively for the purpose of the business. When calculating goods expenditure, purchases on the following are excluded: capital expenditure; food or drink for consumption by the flat rate business or its employees; and vehicles, vehicle parts and fuel.


An added burden for businesses is the requirement to review costs on a quarterly basis to ensure the legislation is being complied with.


The limited credit for input tax with the 16.5% FRS rate means an estimated 4,000 existing FRS users will probably be better off reverting to normal VAT accounting.


The VAT flat rate scheme changes require careful consideration. We can help you to decide whether the flat rate scheme is still right for your business.

Written by Colin Sharpe