Changes to VAT Flat Rate Scheme

The VAT Flat Rate Scheme (FRS) is changing from 1 April 2017 to included a new category of 'limited cost traders' . This is supposedly to tackle "aggressive abuse of the scheme". These businesses will be required to use a FRS% of 16.5% (which equates to 19.8% of the net) which will remove the benefit of being on the scheme for many businesses.

What is the VAT FRS?

The VAT FRS is a simplified VAT scheme whereby the business multiplies gross turnover (including VAT at 20%) by the FRS % for their particular trade sector (e.g. accountant, 14.5%, estate agent 12% etc). (Note there is also a 1% discount off the rate in year 1). However the business is NOT able to claim back input tax on its purchases (EXCEPT capital expenditure costing £2k or more). So a business with a turnover of £100k net and a FRS % of 12% collects £20k VAT from customers and pays £14.4k across to HMRC (£120k x 12%).

The scheme is open to business with a net turnover of up to £150k but you must leave the scheme if your turnover exceeds £230k gross (or £191.67k net).

What is a 'limited cost trader'?

A limited cost trader is a business that has VAT inclusive expenditure on GOODS of

1. less than 2% of their VAT inclusive turnover in the prescribed period (so if prepare quarterly VAT returns rather than annual need to review quarterly)
   
2. greater than 2% of VAT inclusive turnover BUT less than £1,000 per anum

Goods include stationery, promotional goods (tshirts/pens etc), printer cartridges, business cards.

Impact

A number of consultant or service type business in the Flat Rate Scheme will be caught by this as the bulk of their cost base will be services and it won't be practical to spend £1,000 per year on goods such as stationery and printer cartridges.

There will be very little benefit remaining on the FRS if the 16.5% rate applies as most businesses will incur input tax of more than 0.2% of their turnover (e.g. accountancy costs, mobile phone etc.) as at the new rate will be collecting VAT in at 20% and paying across to HMRC at 19.8%.

Therefore businesses in the FRS need to review before 1 April 2017 of whether they are impacted and would benefit from switching to the standard rate scheme or deregister if they are below the VAT threshold (£83,000 turnover in a rolling 12 month period).