flat rate vat

Flat rate changes for limited cost traders

The VAT flat rate scheme (FRS) for limited cost businesses is set to increase to 16.5% from the current rate of 14.5%, this will take effect from 1st April 2017 based on the defined criteria for a limited cost trader.

Under the flat rate scheme, small businesses have to decide which flat rate percentage to use by reference to their trade sector. From 1stApril 2017, FRS businesses must also choose whether they meet the definition of a limited cost trader. A limited cost trader is one whose VAT inclusive expenditure on goods is either less than 2% of their VAT inclusive turnover in an accounting period, or greater than 2% of their VAT inclusive turnover, but less £1,000 per annum if the accounting period is over 1 year.

The goods must be used exclusively for the purpose of the business but exclude capital expenditure, food or drink, vehicles, vehicle parts and fuel (except where the business carries out transport services). HMRC says the exclusions are part of the test to prevent traders buying low value items or one-off purchases to inflate their costs beyond 2%.

This will affect businesses that supply a service on or after 1st April 2017 but either issues an invoice or receives a payment for that supply before 1st April 2017. Any such supply must be treated for VAT purposes as taking place on 1st April 2017. Any invoice or payment that covers continuous supplies of services that cross this date must be apportioned.

The Association of Taxation Technicians (ATT) have warned that the FRS changes will lead to added complexities for small businesses. Ian Carpenter, VAT partner at RSM warned; “unfortunately, the provisions will seemingly impact not only abusive arrangements but also a broad range of legitimate businesses which currently benefit from the current FRS scheme.”

If you have any questions regarding these changes, contact us for further advice.


Info provided by: Accountancy Magazine

Picture from: Geograph

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