• Posted 6th December 2016

VAT Flat Rate Scheme Changes

In the past, all the VAT registered business owners with a taxable turnover of under £150,000 probably have used VAT Flat Rate Scheme (FRS) available to them. This scheme was especially designed to help the small businesses with the record keeping and VAT reporting. However, the change in the scheme announced by the Chancellor Philip Hammond in his Autumn Statement can have a direct effect on them. According to the announcement, a new 16.5% flat rate will be introduced for businesses with limited costs (low cost traders) with effect from 1 April 2017. Low cost traders are the ones whose VAT inclusive expenditure on goods is less than 2% of gross turnover in a given accounting period or greater than 2% of turnover when the amount spend on goods is less than £1,000 per annum if the given accounting period is one year. In case if it is not one year, the amount is the appropriate proportion of £1,000. The reason for this new change is that His Majesty's Revenue & Customs (HMRC) presently considers the benefits obtained from this scheme by the small businesses is excessively abused by them. The businesses that will be mostly be affected by this change are the ones who provide services and do not typically incur large costs for goods. They include consultancy, IT contractors, journalism or entertainment, hairdressers and beauticians, construction (labour only), accountancy and legal services. Even though they are still allowed to use this scheme, they may be discouraged to do so in the coming future. As this scheme allowed the businesses to calculate their VAT liability in a simple way, it would be now be better to use the standard calculation to ensure the VAT liabilities are accurate. We will post further updates on this subject on our future news. If you have any issues regarding VAT, please consult our VAT expert today.