Changes to the Flat Rate Scheme (FRS)

The Autumn statement announced the changes affecting businesses that account for VAT using the Flat Rate Scheme (FRS) and that time has come now, with these rules taking place as of 1 April 2017!

Typically businesses using the FRS are service based companies such as within IT or consultancy that incur few costs subject to Input VAT who use this method to simplify the VAT return process.   This is done by applying a fixed rate percentage based on the industry sector of the company to the VAT inclusive (gross) turnover.

What’s changing?

As of 1 April 2017, businesses operating the FRS are also required to review whether they are deemed to be a “limited cost trader.”

A limited cost trader is a business that has a gross expenditure of:

Less then 2% of their VAT inclusive (gross) turnover in an accounting period

                                                OR

More then 2% of their VAT inclusive (gross) turnover, but less then £1,000 a year.

There are certain expenses however that are excluded from the above such as capital assets, travel and subsistence, service costs such as phone, rent and accountancy.  The Revenue have provided a tool to help determine the limited cost trader position of a business as per the following link:

www.tax.service.gov.uk/check-your-vat-flat-rate/vat-return-period

 

What next?

If you are deemed to be a limited cost trader, the new flat rate percentage of 16.5% should be applied to all VAT inclusive sales (Gross) from 1 April 2017.

If you are preparing a VAT return that also covers a period prior to 1 April 2017, the industry sector flat rate percentage should apply to the prior months and then you should assess thereon in to determine whether the business can continue to apply the industry sector percentage or to apply the new rate of 16.5%.

Alternatively, those businesses that are deemed as a limited cost trader may wish to consider preparing VAT return on the standard method, declaring VAT on net sales and offsetting any Vatable expenditure.  The new percentage of 16.5% has made the variance between VAT liabilities on this method and on the standard method marginal however the standard method would enable a business to claim back the input VAT on your accountancy fees alone, just a thought.

Example based on £100,000 net sales:

New Rate

Net sales             £100,000

VAT on sales      £20,000

Gross Sales         £120,000

@16.5%               £19,800

 

Standard Method

Net sales             £100,000

@ 20%                  £20,000

 

If you would like to discuss this in more detail then please do feel free to get in touch with Alex Skinner at the Perrys city office.

Article written by Alex Skinner