Have you heard of the VAT flat rate scheme or have a friend making use of it? From April 2017, HMRC have changed the rules surrounding the use of the VAT flat rate scheme (FRS). This was a VAT scheme setup by HMRC in order to simplify VAT reporting for small businesses. Depending on your business sector, the amount you paid HMRC for VAT was based purely on sales. Many small businesses have opted to apply for the scheme as it had a cash benefit element to it.
HMRC saw a steady rise in FRS applications in 2015 and 2016. Agencies were advertising this as a cash benefit as the reason to apply for FRS rather than being applied for as a simplification of filing.
Previously, a driver for example, was in the 10% category for FRS. If the driver invoiced £600 (£500 plus VAT of £100), they would only have paid £60 to HMRC and kept £40 for themselves.
From April 2017, HMRC have set a standard flat rate percentage of 16.5% of all categories. Having done the maths, this essentially removes any benefit that may have been previously gained whilst keeping the VAT reporting simplified.
However, there is a rule allowing the previously used rates IF your business has costs of good related to its business turnover of more than 2% and greater than £1,000 per annum.
When assessing this 2% rule, you need to determine what is allowed and what is not allowed. Firstly, HMRC have defined this as “Goods”, and not “Services”. In addition, HMRC have disallowed;
- capital expenditure
- food or drink for consumption by the flat rate business or its employees
- vehicles, vehicle parts and fuel (except where the business is one that carries out transport services – for example a taxi business – and uses its own or a leased vehicle to carry out those services)
The ‘goods’ also need to be specific to the trade of the business. For example, an IT contractor couldn’t buy and resell stationery to get their 2% made up – because they are not operating as a stationer but an IT contractor
If you need help determining if this affects you and what to do next, or if you would like us to review your business to see how this applies to you, please contact us and we’d be happy to help. Perhaps you’ve already decided you need to leave the FRS scheme – we can help you with that too.