Flat rate scheme – FRS – Savings Reduced?

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

OR

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.