On 23 November 2016, the Chancellor of the Exchequer announced the introduction of a new 16.5% VAT flat rate for businesses with limited costs. This will take effect from 1 April 2017.
The Flat Rate Scheme (FRS) is a simplified accounting scheme for small traders with an annual turnover of less than £150,000. Users issue VAT invoices to business customers as normal, but only account for VAT at a flat rate percentage of gross turnover. The rate is calculated depending on the business sector but is normally significantly less than the 20% standard rate of VAT. The percentage includes an allowance for input tax. There have been recent reports that the scheme is being abused by employment businesses supplying staff amongst others.
In order to tackle this perceived abuse, legislation is being introduced so that, with effect from 1 April 2017, any business using the scheme, or wanting to use it, will have to decide if it is a ‘limited cost trader’. A limited cost trader is one who’s VAT inclusive expenditure on goods for the business in a prescribed accounting period is less than 2% of VAT inclusive turnover, or is more than 2% but less than £1,000 a year. Limited cost traders will have to use a flat rate percentage of 16.5% irrespective of the type of business they undertake. Certain low value everyday purchases are excluded from the definition of goods, as is capital expenditure. Expenditure on services is not mentioned.
Paying or invoicing in advance to avoid an increase in tax is known as forestalling. To prevent this, an Anti-forestalling legislation has been introduced to ensure that any limited cost trader using the scheme cannot use a flat rate of less than 16.5% beyond 1 April 2017. This will affect a business that supplies a service on or after 1 April 2017 but either issues an invoice or receives a payment for that supply before 1 April 2017.
This higher flat rate percentage will impact on the savings the scheme can deliver to users with lower VAT-able costs.
If you would like to discuss the likely impact on your business then please contact Paul Robinson on 01482 428009 or email paul@360accountants.co.uk.
