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Will you be affected by the VAT Flat Rate Scheme changes?

Significant changes have been announced by the Government that will affect many businesses who have taken advantage of the VAT savings, as well as the simplicity of the flat rate scheme (FRS).

From 1 April 2017, a new rate of 16.5% will be payable by businesses where their relevant goods (business expenditure) is less than 2% of the gross sales, or if the cost of relevant goods is less than £250 within a VAT quarter.  These businesses will now be called ‘limited cost traders’.

The new rate has been introduced to tackle labour intensive businesses where little is spent on goods.  It is thought that this accounts for two thirds of FRS users, who consequently gain financially and are effectively seen as abusing the scheme.

The expenditure on relevant goods excludes capital expenditure to prevent ‘limited cost traders’ from buying more low value everyday items or one off purchases in a bid to inflate costs above the 2% threshold.  Expenditure should not include:

  • any services – which is anything that isn’t goods
  • expenses like travel and accommodation
  • food and drink eaten by yourself or your staff
  • vehicle costs including fuel unless you’re in the transport business using your own, or a leased vehicle
  • rent, internet, phone bills and accountancy fees
  • gifts, promotional items and donations
  • goods you will resell or hire out unless this is your main business activity
  • training and memberships
  • capital items for example office equipment, laptops, mobile phones and tablets

Expenditure can include:

  • Goods (moveable items or materials) exclusively used in your business. You can also include gas and electricity.

The introduction of this new category will mean that businesses will benefit by a mere 20p for every £100 of VAT exclusive income – a far cry away from the £5.60 per £100 benefit of the 12% category.

If you are now a ‘limited cost trader’ these changes to FRS affect your business.  There is no set rule that applies to all but there are options available to you.

At David Allen our team of experts are currently reviewing all clients that we believe will be affected from the upcoming changes and will contact each individually.  However, in the meantime if you have any queries contact one of our team on 01228 711888 to discuss the options available to you.

Posted: February 20th, 2017

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