Flat Rate VAT percentage

Do you run a small business and pay VAT at an agreed percentage rate on the flat rate scheme (FRS)?

Did you know that from 1 April 2017, there will be a new VAT rate of 16.5% for businesses which have low purchases of goods in an accounting period? Businesses which fall into the new category will be known as ‘limited cost traders’.

Depending on the type of business you run, the new scheme may not be to your advantage and HMRC is expecting a number of businesses deregistering from VAT. But, how best to work out if your business will be affected and if opting out is a sensible course to take?

The VAT Flat Rate Scheme is a simplified accounting scheme for small businesses. Before 1 April, the percentages charged on the flat rate scheme ranged from 4% – 14.5%. HMRC introduced such a range having taken into account different types of business and the amount of goods such businesses were reckoned to buy. However, some businesses with low costs who opted for the FRS were known to be gaining a VAT advantage and the need to stop such abuses is why the new rate has been introduced.

A limited cost trader is a business which spends less than 2% of its VAT inclusive turnover in a VAT period or one where the business VAT is greater than 2%, but less than £1,000 a year, or £250 per VAT quarter.

The definition of goods is taken as items used exclusively for the business but it excludes capital expenditure such as equipment, food and drink bought for the business, and vehicles, vehicle parts and fuel (although the latter exemption does not apply to couriers and taxi firms where the business uses its own vehicles).

Some small businesses, such as IT contractors, consultants and accountancy firms will find that their VAT bill increases under the new scheme.

Reference: http://aspirepartnership.cmail20.com/t/ViewEmail/d/60786A838341702D/1D05384A3D3320C42018F019E6F15D33 (part6)