Changes to VAT flat rate scheme

Users of the VAT flat rate scheme (FRS) may be facing an unwelcome increase in their VAT liabilities following the introduction of new regulations from 1 April 2017.

The VAT FRS permits small businesses to select an appropriate flat rate of tax by reference to their trade sector. However, in response to concerns by the Government that the FRS was being abused, they have introduced a new mandatory flat rate of 16.5%, 2% higher than any other category, for those who meet the definition of a “limited cost trader”. 

A limited cost trader is one whose VAT inclusive expenditure on relevant goods is either:

  • Less than 2% of their VAT inclusive turnover in the prescribed accounting period; or

  • Less than £250 per quarter (or £1,000 per annum if completing annual returns).

The definition must be assessed each prescribed accounting period therefore it is quite possible to be a limited cost trader in one period and back to using sectors rates the following period. Where a prescribed accounting period straddles 1 April 2017, an assessment must be made of the post 1 April 2017 period, with the £250 per quarter/£1,000 per annum threshold apportioned accordingly.

At first glace, the thresholds above may seem quite minimal however it is important to note that the expenditure must be on “goods”; expenditure on services such as travel, hotels, professional fees etc. are excluded when considering whether sufficient expenditure has been incurred.

There are also some notable exclusions from the definition of relevant goods including:

  • Capital items;
  • Motor parts & road fuel (apart from a transport business);
  • Food and drink (for consumption of flat rate trader or staff, i.e. not cost of sales e.g., hotels, cafes, restaurants etc.)

Relevant goods do however include:

  • Gas and electricity, but not telephone, internet charges or rent;
  • Software off the shelf, but not downloaded.

Those affected by the new regulations may wish to consider whether to stay in the FRS, move to standard VAT accounting, deregister for VAT (if voluntary registered), or alternative purchasing strategies to fall outside the definition of a limited cost trader.

If you have any queries regarding how the new regulations will affect your business, please contact your usual Scrutton Bland adviser or Sarah Gamblin on 01473 267000.