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Hints & Tips

Lymm Village

Tax Hints and Tips

Lymm Village

Free hints and tips about tax and accountancy from Lymm Tax

Changes to the VAT flat rate scheme

The flat rate VAT scheme (FRS) is changing from 1 April.

The purpose of the FRS is to make life simpler by cutting down on admin. But many businesses have been able to make money from it.

The government has decided it has had enough and from 1 April the worst abusers will no longer be able to profit financially from the FRS.

Those who have been able to profit most are those who have limited costs, typically those who provide consultancy services. They have incurred very little VAT themselves on their costs. So, using the percentages applicable under the FRS enabled them to pay less VAT to HMRC than they charged their clients and less than they would have paid using the conventional VAT rules.

Such people are now known as “limited cost businesses” and from 1 April they will have a new FRS percentage to apply to their gross income when working out how much to pay to HMRC. The rate will be 16.5% which means the trader will pay to HMRC virtually all the VAT they collect from their customers and will receive no allowance for input tax they have suffered on their costs. Businesses which spend more than a specified amount on specified things will still qualify to use their existing FRS percentage but, as the rules are currently proposed, most of the “specified things” are goods rather than services. I am hoping this will change when the Finance Bill is published after the budget as I see no reason why businesses which spend a lot on services, but not on goods, should be penalised by the changes.

Options for “limited cost businesses”

  • If your turnover is less than £83,000 de-register from VAT.
  • Opt back into conventional VAT accounting
  • Continue using the FRS - in which case you can use your current FRS percentage in those quarters in which you have sufficient qualifying costs and the new 16.5% when you don’t.

The solution will be different for different businesses, so far I have clients doing options 1 and 2. Please contact me for help in deciding what you should do.

If you are affected get your billing done by 31 March, especially if your financial year end is not 31 March.