In the 2016 Autumn Statement, the Chancellor announced that changes are to be made to the existing flat rate scheme for VAT (FRS) in order to tackle perceived ‘aggressive abuse’. The changes, which will take effect 1st April 2017, are designed to ‘reduce the incentive for firms and agencies to move employees to self-employment to exploit VAT simplification aimed at small businesses’. The subsequent HMRC policy paper sets out the details of the changes, which will affect any users, or prospective users, of the FRS.
The FRS is a simplified VAT accounting scheme for small businesses, which currently allows users to calculate VAT using a flat rate percentage by reference to their particular trade sector. From 1st April 2017 a new 16.5% FRS rate will be introduced for businesses with limited costs. Interestingly, HMRC’s policy paper on this change comments that ‘many labour only businesses’ may be affected. Although not yet clarified, this may mean the adjustments will not apply to service-related businesses such as journalists, architects or engineers. Between now and 1st April 2017, anyone currently using the FRS for VAT, or thinking of joining the scheme, will need to decide whether they are a ‘limited cost’ business. For some businesses – for example, those who purchase no goods, or who make significant purchases of goods – this will be obvious. Other businesses will need to complete a simple test, using information they already hold, to work out whether they should use the new 16.5% rate.
A ‘limited cost’ business is defined in the draft legislation as one whose VAT inclusive expenditure on goods is either:
less than 2% of their VAT inclusive turnover in a prescribed accounting period;
greater than 2% of their VAT inclusive turnover but less than £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000).
Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:
capital expenditure goods;
food or drink for consumption by the flat rate business or its employees;
If you need some assistance on checking whether you a ‘limited cost business’ please call us: 01672 624999