Guy Payne & Co

Helping you to help yourself.

0151 353 0067

Changes to the Flat Rate VAT Scheme

The flat rate scheme (“FRS”) was introduced by HMRC to simplify small businesses VAT reporting. Many businesses with low expenses gained a cash advantage from the scheme as they charged their customer 20% VAT whilst they only had to pay HMRC the FRS percentage e.g. 14% of their gross income (percentages are set on a trade sector basis). As such many traders opted to register for VAT voluntarily before their turnover reached the registration threshold to bank the cash advantage.

To prevent abuse of the scheme HMRC have reduced the cash advantage of the FRS scheme for ‘low cost traders’ which will result in the scheme no longer being beneficial for many users, in particular service related businesses.

If the conditions of a ‘low cost trader’ are met the FRS percentage applied will be 16.5%. After taking account of the taxable flat rate benefit this is the equivalent of 19.8% and therefore the scheme becomes uneconomical to use.

A low cost trader is a business whose expenditure on goods is less than 2% of its VAT inclusive turnover or the amount spent on goods is less than £1,000 per year.

The phrase ‘goods’ results in many service businesses being classed as ‘low cost traders’ despite potentially having significant VAT input costs. Rent, software, subcontractors and telephone expenditure are all examples of expenses not classed as goods and therefore are excluded from the low cost trader calculation.  Additionally, expenditure on capital items, motor expenses and food / drink for consumption by the business is excluded.

We are currently advising VAT registered clients if they will be better off:
  • remaining on the flat rate scheme;
  • de-registering for VAT altogether; or
  • transferring onto standard VAT