Flat Rate Scheme Changes

From the 1st April 2017 FRS businesses must determine if they come within the new definition of a Limited Cost Trader if they would like to continue to use the FRS to calculate their VAT liabilities.

A  Limited Cost Trader is defined as a VAT registered business whose VAT inclusive expenditure on Goods is either:

  • less than 2% of their vat inclusive turnover in a prescribed period
  • greater than 2% of the VAT inclusive turnover but less than £1000 per annum in their prescribed accounting period if one year( if not one year the figure is the relevant proportion of £1000).

Goods for the purpose of this measure are goods purchased exclusively for the use of the business, but the term specifically excludes the following items:

  • 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, for example a taxi business).
  • goods for resale, leasing, letting or hiring out if your main business activity doesn't ordinarily consist of these.
  • goods that you intend to re- sell or hire out, unless selling or hiring is your  main business activity.
  • any services

These exclusions are designed to prevent businesses from buying low value everyday items or one off large purchases in order to ensure that their overhead costs exceed the 2% threshold.  A number of other anti-avoidance provisions have also been introduced.

For businesses with extremely high or low overhead costs, it should be relatively straight forward to determine whether is a Limited Cost Trader.

Where a business is a Limited Cost Trader under the new provisions, they will have to apply a new Flat Rate of 16.5% when calculating its VAT liability.

If you are affected by these changes it may be financially beneficial to either deregister the business/company for VAT or to stop using the FRS and revert to the standard method of accounting for VAT and we would consider this on a case by case basis.

If you are impacted by any of the above changes, please contact me for advice and further information:

Wayne Evans, Manager, BPU Accountants

Email: waynee@bpuaccountants.co.uk

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