Shipleys LLP

Chartered Accountants and Professional Business Advisers

The End of the Road for the VAT Flat Rate Scheme?

The VAT Flat Rate Scheme (FRS) has been around for a number of years and is a valuable simplification for many small businesses.

The main purpose of the FRS has always been simplification of VAT compliance.  In practice, however, many users have paid less VAT than they would if using normal VAT accounting and HMRC now believe that this fiscal advantage is being abused.  To combat this a new FRS percentage of 16.5% is expected to be introduced with effect from 1 April 2017 that will have to be applied by any FRS user that qualifies as a “limited cost trader”.

A “limited cost trader” is one where the VAT inclusive expenditure on qualifying goods is either:

  • Less than 2% of VAT inclusive turnover; or
  • Greater than 2% of VAT inclusive turnover but less than £1,000 per year (£250.00 per quarter).

Not all expenditure on goods will count towards the calculation as some items are excluded:

  • Capital expenditure
  • Food or drink for consumption by the business owner(s) or employees
  • Vehicles, vehicle parts or fuel (unless the business carries out transport services).

Although the limited cost test is partly based on annual figures it must be applied every VAT period.

This means that when putting together the VAT return it will be necessary to perform a separate calculation to work out how much has been spent on qualifying goods to see if the limited cost test is failed.  If it is, then the 16.5% FRS rate must be used for that quarter rather than the usual FRS percentage.

For example, a journalist with VAT inclusive turnover of £31,459.00 in the quarter ending June 2017 and VAT inclusive expenditure on books and stationery of £630.00 would pay VAT using the FRS rate of 12.5% which amounts to £3,932.38 for that quarter.

If, however, he had paid only £625.00 for the goods that would be less than 2% of turnover which would mean that the limited cost test would be failed even though he spent more than £250.00.  He would, therefore, have to account for FRS VAT at 16.5% and, as a result, would end up paying an additional £1,258.00 for the quarter.

In light of these changes, all users should review their situation and consider whether continued use of the FRS is worthwhile bearing in mind that HMRC do not, normally, allow a backdated exit from the scheme.

Specific advice should be obtained before taking action, or refraining from taking action, in relation to the above. If you would like advice or further information, please speak to your usual Shipleys contact.

Need more help? Please contact us at advice@shipleys.com or +44 (0)20 7312 0000