The Flat Rate Scheme (FRS) aims to simplify VAT accounting for small businesses by allowing them to work out how much VAT they pay to HMRC by applying a flat rate percentage (depending on the trade category) to their turnover rather than work out the difference between their input and output VAT. However some businesses can achieve savings from being on the FRS.
HMRC has come to the conclusion that some businesses are obtaining a significant financial advantage through the scheme, costing the exchequer hundreds of millions of pounds. To counter this a new 16.5% VAT flat rate percentage for businesses with limited costs came into effect on 1 April 2017.
HMRC defines a business as a ‘limited cost trader’ if its VAT inclusive expenditure is:
- less than 2% of its VAT inclusive turnover in a prescribed accounting period, or
- greater than 2% of its VAT inclusive turnover but less than £1,000 per year (or the relevant portion of £1,000 if the accounting period is less than a year).
Relevant goods are those used exclusively for the purpose of the business, but excludes capital expenditure, food and drink for consumption by the business or its employees, vehicles, vehicle parts and fuel.
This measure will block costly VAT avoidance. However it is also likely to affect many ‘innocent’ small businesses, particularly those supplying labour only services. It you currently use the FRS then please discuss with us whether these changes affect you.