Changes to the VAT flat rate scheme from 1 April 2017

HMRC believes that small businesses have been abusing the VAT flat rate scheme (FRS). When reporting VAT payable the business ignores VAT on purchases with the exception of capital items costing £2,000 or more including VAT.

A trader simply multiplies his gross turnover (including VAT charged at the normal rate) by the FRS percentage set for his particular trade sector.

Common ones are:-

  • Business services not listed elsewhere 12.0%
  • Estate agents and property management 12.0%
  • Journalism or entertaining 12.5%
  • Management consultancy 14%
  • Accountancy and legal services 14.5%
  • Computer or IT consultancy 14.5%

Where little is incurred by way of expenses less VAT will be paid to HMRC than would be paid not using FRS so a profit is made and this can be substantial.

From 1 April 2017 a business will have to use a FRS percentage of 16.5% if it is a ‘low cost trader’.

So on an invoice of £200 + VAT = £240 VAT of 16.5% will have to be accounted for which is £39.60. This is only 40p less than the VAT would have been, being the equivalent of 19.8%.

A’ low cost trader’ is a business whose expenditure on goods (not services) is less than 2% of its gross turnover, or if more than 2% is less than £1,000 per annum. Any expenditure on capital items, motor expenses, or food or drink for consumption by the business is ignored.

With the emphasis on goods this means that businesses who incur VAT on such services as rent, IT support, sub-contractors etc. will be particularly hard hit.

Any attempt to invoice in advance of a service to be provided on or after 1 April 2017 will be caught. The invoice will be moved until after 31 March 2017.

So businesses need to look at their current position and consider withdrawing from FRS from 1 April 2017 or deregister altogether if trading below the deregistration threshold (currently £81,000).

To leave, you have to write to HMRC and they will confirm your leaving date. If you are deregistering you will be treated as staying within the scheme to the day before you come out and have to account for VAT on the one day under normal VAT rules.