If your business is using the flat rate VAT scheme (FRS) you need to be aware of significant changes being introduced from April 2017.
HMRC will increase the VAT flat rate to 16.5% across the board where users of the FRS fall into the category of being a ‘limited cost trader’.
A limited cost trader is a business whose expenditure on goods (on a VAT-inclusive basis) is either:
Less than 2% of VAT inclusive turnover.
More than 2% of VAT inclusive turnover but less than £1,000 annually. If the accounting period is less than a year, the £1,000 is apportioned accordingly.
‘Goods’ are defined by HMRC as items used wholly for business purposes. The following do not count in this context:
Capital expenditure – including goods costing over £2,000 on which input tax can be claimed under the FRS or goods such as printers, furniture, and tools.
Food or drink consumed within the business or by employees.
Vehicles, vehicle parts and fuel (except if the business provides transport services – e.g. a taxi business – and uses its own or a leased vehicle for those services).
Goods used partly or wholly for non-business/private purposes.
If the FRS VAT rate you use to calculate your output tax (VAT on sales) is lower than 16.5%, and your business fits the definition of a limited cost trader you could be paying more VAT from 1 April 2017.
What to do:
Work out whether your business is a limited cost trader.
Evaluate the difference in output VAT payable at 16.5%, compared to your current rate.
Evaluate VAT payable under ‘normal’ VAT arrangements.
If the difference between paying 16.5% and normal VAT is marginal it may be worthwhile staying with the FRS and paying the higher rate, rather than take on the admin of full VAT reporting.
If you decide to leave the scheme you must notify HMRC in writing in advance. HMRC can take several weeks to deal with correspondence.
If you have any doubts or questions the team and Langricks will be happy to advise.