The VAT Flat Rate Scheme (FRS) is a simplified scheme for small businesses. It is a popular scheme with businesses that incur very little vatable expenditure. Currently there are a number of different sectors, with rates ranging from 4% to 14.5%.
Following on from the Autumn statement, the Chancellor announced the introduction of a new 16.5% VAT flat rate for businesses with limited costs, known as ‘limited cost traders’. This new rate will take effect from 1 April 2017, and will affect many of the smaller business within the consultancy and contracting sector.
Is my business a limited cost trader?
A limited cost trader is defined as one whose VAT inclusive expenditure on goods is either;
- less than 2% of their VAT inclusive turnover in a prescribed accounting period
- greater than 2% of their VAT inclusive turnover, but less than £1,000 per annum if the prescribed accounting period is one year.
For this purpose, goods must be used exclusively for the purpose of the business, but do not include the following;
- Capital expenditure e.g. laptops, mobiles phones, office equipment etc.
- Food or drink for consumption by the flat rate business or its employees
- Vehicles, vehicle parts and fuel and or travelling.
If, after excluding the above items, expenditure on goods for your business is less than 2% of VAT inclusive turnover or £250 per quarter, then the new 16.5% flat rate will apply to your business from 1 April 2017. If a VAT period straddles 1 April 2017, the new rate will then apply to the relevant proportion of the VAT period.
How will these changes affect your business?
The changes can be easily illustrated in the following example;
A sales invoice for £1,000 plus vat is raised (£200 vat, £1,200 gross). The output vat which you would pay over to HMRC under the old scheme, new scheme, and the standard vat scheme, would be as follows;
As you can see, there is now a negligible vat saving between the standard vat scheme, and the new rate of 16.5%. This is before taking into account the vat element on any business costs, which you could reclaim through the standard scheme. It may now be appropriate for you to contact HMRC to advise you wish to leave the flat rate scheme and revert to the standard scheme.
Every company will be different and will have differing levels of vatable overheads to find out more please get in touch with your usual contact at Drummond Laurie or email firstname.lastname@example.org.