Flat Rate VAT Changes: What You Need to Know

In the 2016 Autumn Statement, long before Prime Minister Theresa May called the fast-approaching surprise election on 8 June 2017, Chancellor Philip Hammond announced significant changes to the VAT Flat Rate Scheme (FRS).

The VAT Flat Rate Scheme is designed to simplify record keeping and make it easy for businesses to work out the amount of VAT they have to pay.

Under normal VAT guidelines, for traders over the threshold it is mandatory - currently at £85,000 in any twelve month period - pay VAT on the difference between what they charge customers (on goods and services sold) and the VAT being reclaimed on supplier invoices.

FLAT RATE SCHEME EXPLAINED

According to FRS rules, you can still charge customers VAT the normal way, but pay a percentage of your total sales, at rates that are dependent on your sector and trade. For example, clothes shops only pay 7.5% under the scheme, so gross sales of £500 - including VAT of £83.33 - will result in a payment of £37.50 to HMRC (£500 x 7.5%). This gives the business additional profit of £45.83.

We would advise any business owner claiming under GFRS guidelines to check which sales count and the relevant percentage for their industry and sector, especially if you are making financial projections. Of course, we always keep up to date with HMRC changes and training and advise individual clients accordingly if changes impact them.

As part of sweeping changes to increase revenue receipts from businesses, the government is keen to tackle what it considers ‘aggressive abuse’ of the flat rate scheme.

WHAT DO THESE CHANGES MEAN?

These changes will affect businesses that spend less than 2% - or £1,000 (even if this is more than 2%) - of revenue on goods (not services) in any twelve month period. They came into effect in April 2017.

HMRC is classifying these as “low-cost traders”, and we expect this will impact service companies the most since many don't spend much on goods and products. Under this new “low cost” classification, these companies need to pay 16.5% to HMRC. Based on the example above, £500 in sales - including VAT of £83.33 - will result in a payment of £82.50 to HMRC (£500 x 16.5%).

As part of these changes, HMRC will not allow the following under “goods and products”:

  • Capital costs, including computers, phones, and office equipment;
  • Food and drink;
  • Vehicle costs, unless you are in the transport sector or driving a leased vehicle for business;
  • Goods you will resell or hire - unless this is your core business activity;
  • Gifts, promotional items and other products;
  • Anything which isn’t physical, including rent, phone bills, accountancy fees and travel.

Since these changes have recently come into force, we expect HMRC to take a closer interest in submissions under the “low cost” classification of the flat rate scheme, which means more evidence may be required to satisfy reporting requirements.

Click here to find out if you meet the “low cost” criteria under the changes to the flat rate scheme.


Disclaimer: We hope you found the information in this article useful and informative. Please remember that this is an article and is no substitute for professional advice on taxes, your business or personal finances.