In the 2016 Autumn Statement the Chancellor announced a proposed change to the Flat Rate Scheme (FRS) which will affect businesses who purchase a limited amount of goods.  This change, once implemented, introduces a new FRS rate of 16.5% from 1 April 2017 for those businesses which will fall within the definition of “limited cost trader”. 

A “limited cost trader” is a business whose level of spend on the purchase of goods (including VAT) is either:

• less than 2% of the flat rate turnover; or
• greater than 2% of the flat rate turnover but less than £1,000 per annum (£250 per quarter)

The purchase of services are ignored for the purpose of establishing whether the business is a “limited cost trader”.

Typically the goods which are included within the calculation are stationery and office consumables. Certain “goods” are excluded e.g. food or drink for employees, goods for resale unless it relates to the main activity of the business and the purchase of fuel unless the business operates within the transport sector.

In order to establish whether you are a “limited cost trader” you must undertake the calculation each and every VAT period.  The new rate is only applied in the period in which you are a “limited cost trader”.  If your level of purchases in the next VAT accounting period exceeds the above thresholds then you revert to using your previous sector rate.  An added complication for businesses whose VAT return straddles the 1 April 2017 is that part of the VAT period will fall under the old rules whereas from 1 April 2017 they will be subject to the new rules.

The new rate will effectively remove any perceived financial benefit the FRS offers although for some businesses the relative simplicity of the scheme will remain a key consideration.

What should you do?

Businesses will need to establish whether they will be affected by the new rules and whether it would be more beneficial either deregistering (where possible) or moving to standard VAT accounting.  In the latter case it is necessary to write to HMRC to formally notify them that the business is ceasing to use the FRS.

Got a question?

If you operate the FRS and are concerned you could be affected by this change, please get in touch with a member of our VAT team.