From 1st April 2017 a significant change was made to the VAT Flat Rate Scheme (FRS). HMRC introduced this as a way of ‘tackling aggressive abuse’ of the previous scheme rules.
VAT Flat Rate Scheme – background
The VAT FRS was introduced in 2002 as a simplified method for eligible businesses to work out their VAT liability. Businesses paid a fixed percentage of VAT on the gross turnover, and the percentage was dependent on the type of business (for example accountancy businesses paid 14.5%). The input VAT reclaimable was then restricted.
Changes from 1st April 2017
HMRC felt there were certain types of businesses who were able to use the FRS purely in order to create a surplus of VAT charged to customers compared with the amount then paid over to HMRC.
Therefore, they introduced a change that meant certain businesses would be classed as ‘limited cost traders’, who would then have an FRS percentage of 16.5% applied. 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 £1000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000)
Goods do not include:
- Capital expenditure
- Food or drink for consumption by the flat rate business or its employees
- Vehicles, vehicle parts and fuel (except where the business is one that carries out transport services – such as a taxi business – and uses its own or a leased vehicle to carry out those services)
Full HMRC guidance on the VAT FRS can be found here.