Changes to the Flat Rate VAT scheme
A new VAT rate will shortly be introduced under the FRS as announced in the Autumn Statement, issued by the Chancellor of the Exchequer on 23 November 2016. The changes will be applicable from 1 April 2017 subject to any changes in the scheme as a result of the recent consultation. The new rules are likely to impact on a large number of personal service “one man” companies operating in the oil and gas sector.
It is important that you read the information below, consider the impact on your business and contact your usual advisor if you have any uncertainty on what action to take.
DETAILS OF CHANGES
Currently, the flat rate applied under the scheme depends upon the trade carried on by your business. The Chancellor has introduced a new flat rate of 16.5%, applicable to ‘limited cost traders’.
A limited cost trader is one whose VAT inclusive expenditure on goods (not services) is either:
- less than 2% of VAT inclusive sales during an accounting period; or
- less than £1,000 per annum, pro rated for longer or shorter periods.
VAT inclusive expenditure must be exclusively for the business and cannot include:
- capital expenditure;
- costs with a dual purpose e.g. printer ink and stationery that might also incur occasional private use
- food or drink for consumption by the flat rate business or its employees
- vehicles, vehicle parts and fuel; or
- goods acquired with the intention of giving them away to a third party.
The changes will be applicable from 1 April 2017. A worked example of how the new scheme will operate is downloadable below.
Businesses who are expected to be limited cost traders have two options:
1. From 1 April 2017, you can continue to use the FRS, but adjust your flat rate of VAT to 16.5% of VAT inclusive sales (an effective VAT rate of 19.8%).
2. De-register from the FRS and use the standard VAT scheme accounting for all output and input tax on your quarterly VAT return.
The amount of VAT to be paid on a quarterly basis will be higher where the new 16.5% rate is implemented and if you de-register from the FRS there will be an additional administrative burden associated with re-joining the standard scheme.
It will be for you to decide whether the VAT saving is worth the additional administration. Please contact us if you have any queries in respect of these considerations.
Businesses who are not expected to be limited cost
If you do not expect to be a limited cost trader under the new rules, then you can continue using the FRS in the same way. It is the responsibility of the directors to monitor the VAT position, and ensure the business is operating in accordance with VAT legislation. If you are uncertain about which scheme should be implemented, please contact us so that we can assist you.
As with any self assessment tax, if the correct rate of VAT is not applied, the business may be liable to pay surcharges and interest in addition to any additional liability which arises. Should you have any queries or require any assistance in relation to the changes to the Flat Rate VAT scheme, please do not hesitate to contact us.
Download this worked example which illustrates the scenario Flat Rate Scheme Example