The end of the VAT Flat Rate scheme is here

Back in December we wrote a blog about the announcement of the introduction of a new 16.5% VAT flat rate for businesses with limited costs. The HMRC has now updated their guidance (VAT Notice 733), and we are able to give you a better run down of what to expect.

The new category will be introduced by secondary legislation, effective from 1 April 2017 and will represent a major change to 123,000 FRS users, according to HMRC.

How will the proposed change work?
From 1 April 2017, FRS businesses must determine whether they meet the definition of a limited cost trader, and need to apply 16.5% (Instead of the normal FR%) to the VAT inclusive turnover.

Businesses using the scheme, and new businesses joining the scheme, will need to complete a simple test, using information they already hold, to work out whether they must use the new 16.5% rate. To support businesses, the government have an easy to use online tool (Still in Beta) that will help them determine whether the new rate applies to them.

What is a limited cost trader?
A limited cost trader will be 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 £1000 per annum (or £250 per quarter)
  • the goods must be used exclusively for the purpose of your business
  • you receive a supply of goods (including by acquisition or import) if the exclusive ownership of moveable items is passed to you from another person.
For this measure the following goods are excluded:
  • vehicle costs including fuel, unless you’re operating in the transport sector using your own, or a leased vehicle
  • food or drink for you or your staff
  • capital expenditure goods of any value
  • goods for resale, leasing, letting or hiring out if your main business activity doesn’t ordinarily consist of selling, leasing, letting or hiring out such goods
  • goods that you intend to re-sell or hire out, unless selling or hiring is your main business activity
  • goods for disposal as promotional items, gifts or donations
  • any services
Anti-forestalling provisions
Paying or invoicing in advance to avoid an increase in tax is known as forestalling. Anti-forestalling legislation was published on 23 November 2016 and should be read alongside this guidance. This can be found in sections 8.2 and 9.7 of VAT Notice 733. It is designed to prevent any business defined as a limited cost trader from continuing to use a lower flat rate beyond 1 April 2017.

Businesses using the FRS will check the actual spending on goods each quarter and identify whether they can submit the return based on the normal trade sector category (e.g. accountant 14.5%, other services 12%) or whether the VAT inclusive expenditure on ‘goods’ is less than 2% of its gross sales or £250, and the 16.5% rate will therefore apply.

These businesses will be expected to ensure that, for each accounting period, they use the appropriate flat rate percentage.

Here are some figures that we have put together, based on an average contractor’s VAT quarter:

For companies that are NOT a limited cost business, continue as normal on your relevant flat rate.

For companies that are limited cost business:
  • Choice to remain in the FRS and use the 16.5% from 1 April 2017
  • Choice to leave the FRS and move to the standard rate
  • If your turnover is below the VAT threshold (currently less than £81,000) then de-register
If you would like to move away from the FRS or would like to deregister for VAT, please get in touch with your account manager ASAP as these cannot be backdated, and the application needs to be submitted before your next VAT return is submitted.

  • The 1% discount for the FR scheme still applies for the first year after the company has registered for VAT
  • If your VAT period straddles the 1-Apr-17 change, then the new rates only applies to the period after 1-Apr-17. For turnover before 31-Mar-17, your normal FR% will apply.