VAT flat rate scheme changes
In a surprise announcement in the 2016 Autumn Statement, the Chancellor announced some VAT flat rate scheme changes. The changes to the existing flat rate scheme for VAT (FRS) are in order to tackle perceived ‘aggressive abuse’. The VAT changes will take effect from 1 April 2017. They are designed to ‘reduce the incentive for firms and agencies to move employees to self-employment to exploit VAT simplification aimed at small businesses’. The HMRC policy paper published in December details VAT flat rate scheme changes, which may affect any users of the FRS.
The FRS is a simplified VAT accounting scheme for small businesses. It currently allows users to calculate VAT using a flat rate percentage by reference to their particular trade sector. From 1 April 2017 a new 16.5% FRS rate will be introduced for businesses with limited costs. HMRC’s policy paper on this change comments that ‘many labour only businesses’ may be affected. Although not yet clarified, this may mean the adjustments will not apply to service-related businesses such as journalists, architects or engineers.
What to do
Anyone currently using the FRS for VAT will need to decide whether they are a ‘limited cost’ business. For some businesses – for example, those who purchase no goods, or who make significant purchases of goods – this will be obvious. Other businesses will need to complete a simple test to work out whether they should use the new 16.5% rate.
If so, they may want to consider leaving the scheme to reduce the VAT paid to HMRC. Or even deregister from VAT completely if within the deregistration limits. Alternatively, they could try to spend more on goods to qualify for the usual flat rate, but check the exemptions below.
Limited Cost Trader
A ‘limited cost’ business is defined in the draft legislation as 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 £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000).
Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:
> capital expenditure goods;
> 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 prevent traders buying low value everyday items or one off purchases so to inflate their costs beyond 2%.
To support businesses implement this change, HMRC have said that they will be launching an online tool. This is so users of the FRS to determine whether they must use the new rate after the VAT flat rate scheme changes.