In the Autumn Statement, changes were made to the flat rate scheme for VAT.
HMRC feels that the FRS has been used as tax avoidance and after excessive application, anti-avoidance measures have been put in place.
From April 2017 a test will need to be applied for every VAT quarter where a return is filed under the flat rate scheme. This test will be to establish if you are a “low cost trader”.
You will be a low cost trader if: –
1 – your gross expenditure on goods is less than 2% of your gross turnover in the period.
For example, if your turnover for the quarter was £12,000 (including VAT) and your purchases were less than £240
2 – your gross expenditure on goods is greater than 2% but less than £2,000 over the year
Expenditure will exclude capital expenditure, food & drink & motor vehicles, motor parks & fuel (expect in some circumstances)
Where you are seen to be a low cost trader, the flat rate percentage used will be 16.5% which reduces the cash saving.
Guidance is available on the HMRC page – https://www.gov.uk/government/publications/tackling-aggressive-abuse-of-the-vat-flat-rate-scheme-technical-note/tackling-aggressive-abuse-of-the-vat-flat-rate-scheme-technical-note
Get in touch if you would like to discuss how these changes affect you.