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Major changes to the VAT Flat Rate Scheme

Major changes to the VAT Flat Rate Scheme

If you currently charge 20% VAT on your sales to customers but pay a much lower VAT rate as a percentage of your Gross sales (between 12-14%)  please read on!

From the 1st April 2017, the Flat Rate VAT Scheme is changing.  HMRC is introducing a new 16.5% rate which is likely to be less attractive to use

Who does it apply to?

This new rate will apply to businesses with limited costs and you will need to decide if you are what HMRC refer to as a ‘limited cost trader’.  A limited cost trader is defined as one whose VAT inclusive expenditure on ‘relevant goods’ is less than 2% of their VAT inclusive turnover in a prescribed accounting period.

What are relevant goods?

‘Relevant goods’ must be used exclusively for the purpose of the business.  Examples include:

  • Stationery/office supplies
  • Stocks for a shop
  • Cleaning products
  • Software
  • Hair products for hair salons

It does not include:

  • Capital expenditure
  • Food or drink
  • Vehicle costs including parts and fuel
  • Payments for services i.e accountancy fees, rent, advertising, sub-contractors
  • Anything provided electronically i.e. download of a magazine or software

Most consultancy type businesses will not purchase goods that are greater than 2% of turnover as generally the majority of costs incurred are for services.

Example of using the new 16.5% Rate:

Amount billed to customer                  £100,000 plus VAT of £20,000 = £120,000

Vat due to HMRC                                  £120,000 X 16.5% = £19,800

Vat to be retained                                  £200.00

This compares to £3,200 retained currently if you are on 14%!  As you can see the new flat rate is not so attractive

If your next VAT return quarter ends in April or May you will have to use your current % for the months up to April and the 16.5% for months April onwards.

What can you do?

We believe you have 3 options:-

  1. You can continue to use the FRS and pay VAT at 16.5%
  2. You can leave the FRS and switch to normal VAT scheme – this will mean you can reclaim VAT on purchases and deduct this from the VAT received on your sales before you pay HMRC each quarter.  In nearly all cases this VAT reclaim will be higher than any VAT retained using 16.5%
  3. If you are below the VAT threshold of £83,000 per annum you can de-register from VAT completely and stop charging VAT to your customers – you will not be able to reclaim VAT on purchases if you are not VAT registered

If you would like help or advice in understanding the most appropriate way forward for your business, please do get in touch.