There are two main reasons why business owners need to be aware of the significant Flat Rate VAT changes for 2017:

  • You may need to pay HMRC more VAT
  • You could end up with a hefty VAT bill at a later date

This is why it’s important for anyone who owns a business to FULLY understand the complex Flat Rate Scheme (FRS) changes which came into effect from 1st April 2017.

To put it simply, any business using the Flat Rate Scheme but which actually spends very little on goods – including raw materials – could now have to pay more VAT.
Basically, the FRS has been altered (and the VAT rate increased to 16.5%) to stop businesses, and contractors in particular, from making healthy surpluses from the scheme – which HMRC feared was being abused.

The Flat Rate Scheme explained

The FRS was designed to simplify the recording of sales and purchases for small businesses and sole traders.

The VAT flat rate percentage which applies to you depends on the type of business you run.

The FRS let you calculate the total amount of VAT due by applying a fixed flat-rate percentage to gross turnover.

But, unlike standard VAT turnover, flat rate turnover takes into account business income (from sales) and the VAT paid on that income.

Since the changes were implemented on 1st April 2017, all businesses wanting to use the scheme must now work out if they qualify as a ‘limited costs’ business.

To meet the FRS requirements, the amount spent on relevant goods (including VAT) must be:

  • Less than 2% of VAT flat rate turnover in a prescribed accounting period
  • OR
  • More than 2% of VAT flat rate turnover – but less than £1,000 a year

What are classed as ‘relevant goods’ by HMRC?

Various exclusions apply in order to prevent businesses making one-off purchases or buying low value everyday items or to inflate their costs beyond 2 per cent.

Goods MUST be used ONLY for the purpose of the business and DO NOT include:

  • Accountancy fees
  • Any services which are not goods
  • Capital expenditure – office equipment, PCs, laptops, mobile phones etc
  • Food and drink expenses
  • Gifts and donations
  • Goods you resell or hire out – unless it’s your main business activity
  • Rent, internet, phone bills
  • Training and memberships
  • Travel and accommodation expenses
  • Vehicle costs (including fuel) unless you are in the transport business

Who will the Flat Rate VAT changes 2017 affect?

There’s no getting away from the fact that firms who provide services, and labour-intensive businesses which spend little on goods, will pay more VAT.

Most consultants, IT contractors and construction workers – who supply their labour but do not buy the raw materials they use – will be affected.

Businesses which use the FRS, or are thinking of joining the scheme, must now think carefully about whether they are a ‘limited cost’ trader.

For businesses who purchase no goods, or those who make significant purchases, this will be obvious. Others must use their accounting information to complete a simple test and work out whether they should use the new 16.5% rate.

Businesses using the FRS will be expected to ensure that they use the appropriate flat rate percentage for each accounting period.

What should I do next?

Deciding whether to remain on the Flat Rate Scheme or move to a Standard VAT Scheme depends on your individual business circumstances – and your levels of capital expenditure.

For some businesses, it makes more sense to pay VAT via the standard accounting practice because they end up paying less.

To find out if you should be on the FRS – or if you want to know whether you should remain on it, take a close look at your trading activity and VAT levels.

Businesses can also work out if they are eligible to be a ‘limited cost’ business by using this free Flat Rate Changes 2017 tool from HMRC.

You can also use this HMRC guidance to discover the Flat Rate Scheme percentages that would apply to your company.

Be warned: Getting the Flat Rate VAT changes wrong could mean that a limited costs trader ends up paying out more than necessary!

If you don’t know what’s best for your business, you MUST seek professional advice!

Doing nothing is not an option. Otherwise you could get a nasty surprise when it comes to paying your VAT – especially if you do this annually!

We will happily advise you about whether it’s best to be on the standard VAT scheme or the FRS – if you require further help, please get in touch or call 0113 2189552 to arrange a free VAT consultation.

Northern Accountants (Leeds), Olympus House, 2 Howley Park Business Village, Pullan Way, Leeds, LS27 0BZ