In the Autumn Statement the Chancellor has announced changes to the flat rate scheme of VAT accounting.
The current scheme allows a trader to pay a certain percentage of one’s gross turnover over to HMRC as VAT outputs instead of the 20% charge added to the invoice – the down side being that no input can be claimed unless it is on specific items, capital expenditure costing more than £2000.
The trader has the option to pick the appropriate VAT percentage. Although there is some VAT saving in this the real benefit is lower administration required to account for the VAT.
Many traders have been using a 12.5% rate, which relates to when you cannot specifically classify your type of income.
From 1st April 2017 all businesses which use the flat rate scheme will be required to check if they are "a limited cost trader”, if so they must use a 16.5% FRS rate. The effect will be to virtually wipe out any VAT saving or even possibly leave businesses worse off than they had been prior. Businesses that offer personal services e.g. Consultants are the most likely to be affected by the new rules.
What is a Limited Cost Trader?
A limited cost trader is one whose VAT inclusive of expenditure on goods is either:
- Less than 2% of its VAT inclusive turnover in the VAT return period or
- Greater than 2% but less than £1000 per annum (time apportioned for shorter return periods e.g. £250 for the VAT quarter).
When testing if either of the 2% or £1000 conditions apply the VAT paid on certain types of expenditure must be ignored.
- Those not exclusive to be used for your business;
- Capital expenditure;
- Food or drink for consumption;
- Vehicles, vehicle parts and fuel except where your business supplies transport services for example a taxi.
To prevent businesses maximising VAT savings before the new rules take effect there are forestalling measures applied since 28th November.
If your likely to be a limited cost trader it is almost certain you will be better off opting out of using the FRS after 31st March 2017.