As of 1st April 2017, HMRC have introduced a new flat rate of VAT for businesses with ‘limited costs’. The new rate should be broadly VAT/profit neutral and therefore should counter abusive behaviour. The flat rate scheme (FRS) was initially introduced as a simplified VAT scheme, not a tax allowance, however many businesses in the past have been able to exploit the scheme for the benefit of the business.
A business is a limited cost trader if its VAT inclusive expenditure on goods is:
• Less than 2% of relevant (VAT inclusive) turnover, or
• More than 2% but less than £1,000 per year, pro-rated for the length of the VAT return period, e.g. £250 per quarter.
Businesses that meet the criteria will need to apply a flat rate percentage of 16.5%. HMRC will expect businesses to correctly amend and apply the rate, where applicable. Under the new proposal a business within the FRS will have to consider for each accounting period whether it meets the conditions for a limited cost trader.
Relevant turnover is the amount that you apply your flat rate scheme percentage to, i.e. VAT inclusive supplies, including exempt supplies.
• Goods are those used exclusively for business purposes such:
• Stock for onward sale
• Items for provision of services
• Raw materials
• Office supplies
• Electricity/gas exclusively for the business
It does not include:
• Capital expenditure
• Food & drink for consumption by the Flat Rate business or its employees
• Vehicles, vehicle parts and fuel, unless the business is one which supplies transport services such as a taxi business
• Goods for the purposes of resale, except where part of normal business
• Promotional items
HMRC have introduced measures to prevent businesses from reducing their post April 2017 turnover by issuing invoices early.
If a business supplies a service on or after 1 April 2017, but issues an invoice or receives payment before 1 April 2017, then those supplies are treated as being made on 1 April 2017 for the purposes of considering whether the limited cost trade definition is met.
For business that do not meet the limited costs trader limits, there are no changes.
Businesses meeting the limited cost trader requirements:
• Will need to ensure application of the new rate of 16.5% from 1st April 2017.
• Choose to continue using FRS or change to an alternative scheme
• If trading below VAT deregistration threshold, deregister
Please note the 1% discount still applies for low costs business in the first year or registration under the FRS, e.g. 15.5% or 1st year for Limited costs traders.
- If your business leaves the scheme, you will need to inform HMRC online or in writing
- If your business leaves the scheme, you cannot rejoin for 12 months
- Businesses deregister from the date of deregistration, not retrospectively
- Advertising costs, accountancy fees, and software licences are excluded, as these are services
- The new rules are to apply to all businesses, but are unlikely to impact those selling goods due to the limits.
For further information please see VAT Notice 733: Flat Rate Scheme for small businesses.
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