From 1 April 2017 a new flat rate scheme ‘FRS’ VAT category will be introduced for any business deemed to be a ’limited cost trader’. HMRC estimates that 123,000 out of 411,000 existing FRS users will belong to the new category.
This new category will have a rate of 16.5% which means that minimal input tax credit will be given for a business whose sales are all standard rated.
What is a limited cost trader?
The starting point is that each FRS user must consider whether his or her business is a limited cost trader at the end of each VAT period. There are two key tests:
• Is expenditure on goods (including VAT) less than 2% of its gross sales?
• Is expenditure on goods less than £1,000 a year (ie £250 a quarter)?
A ‘yes’ answer to either of the above questions means that the business is a limited cost trader and the 16.5% rate will therefore apply.
The definition of goods excludes vehicles, road fuel and motor parts (unless the expense relates to a transport business such as a taxi firm), as well as food, drink and capital goods. Supplies of electricity and gas are classed as goods and included in the calculation whereas rent, telephone and internet charges are services so are excluded.
The technical guidance adds an extra layer of complexity by saying that only goods with 100% business use can be included in the 2% calculation so an electricity bill with part business and part private use is excluded completely.
Example
John is a health and safety consultant who uses the FRS. The rate he uses is 12% for ‘business services not listed elesewhere’.
For the VAT quarter ending 30 June 2017 he had gross sales of £10,000 including VAT (all standard rated). His VAT-inclusive spending on qualifying goods for the same period was £240. The business must adopt the 16.5% rate and pay £1,650 of VAT if the £240 spending on goods is
• Less that 2% of sales (£10,000 at 2% = £200); or
• Less than £1,000 a year ie £250 a quarter
A total goods figure of £240 including VAT passes the first test but not the second so the 16.5% rate must be adopted. The end result is that John will pay an extra £450 of VAT compared to is usual 12% rate.
Options going forward
• If you are under the deregistration threshold of £81,000 you could choose to deregister from VAT altogether.
• Choose to stay in the scheme and accept the 16.5% higher rate. In some quarters you may have a big spend on stationery etc and get to use the lower rate for those quarters.
• Revert to normal VAT accounting. HMRC must be notified if you choose to take this route.
Other notes
• The 1% discount for scheme users in the first year of trading will be available to limited cost traders, so a rate of 15.5% can be used in the first year.
• HMRC has said that an online tool will be available to enable current and prospective FRS users to determine whether they must use the new rate. This has not yet been released.
If you would llike to discuss any of the above and how it affects you and/or your business please feel free to get in touch.
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