VAT Flat Rate Scheme – Time for a change?

08 May 2017

As we move into May, the effect of the changes to the Flat Rate Scheme introduced from 1 April 2017 are beginning to bite.  Introduced to combat perceived misuse of the scheme, like any widely drawn anti-avoidance measure, other taxpayers will be caught by the measures.

In summary, all Flat Rate businesses will be required to complete a simple test each VAT period (either monthly/quarterly/annual) to ascertain whether they are a “limited cost” trader.  HMRC’s definition of a limited costs trader is someone whose expenditure, including VAT, on business goods in that VAT period is:

  • Less than 2% of the trader’s VAT inclusive turnover in the VAT period; or
  • Greater than 2% of their VAT inclusive turnover but less than £1,000 per year (or £250 per quarter/£83 per month)

HMRC’s guidance states that goods should be those used exclusively for business purposes but excluding:

  • Capital expenditure
  • Food and drink for consumption by the flat rate business or its employees
  • Vehicles, vehicle parts and fuel.

Where, following completion of the calculation, you are deemed to be a limited costs trader, you should apply the 16.5% rate to establish the VAT due to HMRC.  If not, you can continue to use your current percentage for that VAT period.

Illustration of impact

VAT under FRS @12%

VAT under FRS @16.5%

VAT under normal VAT Accounting

Quarterly VAT inclusive turnover of £30,000

£3,600

£4,950

£5,000

 

If you are a “limited cost business”, should you continue to use the flat rate scheme or convert to normal VAT accounting?

This will depend on the level of input VAT incurred on other goods and services purchased for your business.  In the example above, over the course of the year a limited cost business will pay £200 less output tax than would be due under normal VAT accounting.  However, if the input tax on vehicle expenses, audit and accounting fees and other expenditure exceeds £200, operation of the flat rate scheme will leave the limited cost business in a worse position.

Flat rate businesses should be reviewing their position now and deciding, based on your own individual circumstances, whether it is better to switch to normal VAT accounting or, if your turnover is less than £83,000 it is better to deregister.

AAB’s Indirect Tax team can help you understand whether you are caught by the new rules.  If you require further information, please contact Alistair Duncan, Indirect Tax Director (alistair.duncan@aab.uk) or your usual AAB contact.

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