“The amount of VAT a business pays or claims back from HM Revenue and Customs ( HMRC ) is usually the difference between the VAT charged by the business to customers and the VAT the business pays on their own purchases. With the Flat Rate Scheme: you pay a fixed rate of VAT to HMRC”. The flat rate scheme you use will depend on the industry you operate in.
FRS/Flat Rate Scheme – Changes from April 2017
From 1 April 2017, if your VAT inclusive costs on goods* (see excluded items below) rather than services are less than 2% of your VAT inclusive sales in any VAT period, you must pay HMRC 16.5% of your VAT inclusive sales for each VAT period this applies. That’s instead of the flat rate percentage that normally would apply to your business. HMRC describes such businesses as “limited cost traders” under the umbrella of which you may fall.
This can end up costing traders several thousand in lost benefit.
- the goods must be wholly, exclusively and necessarily for the purposes of trade
- you receive a supply of goods (including by acquisition or import) if the exclusive ownership of moveable items is passed to you from another person.
We exclude the following ‘goods’ for this purpose:
- vehicle costs including fuel, unless you’re operating in the transport sector using your own, or a leased vehicle
- food or drink for you or your staff
- capital expenditure goods of any value
- goods for resale, leasing, letting or hiring out if your main business activity doesn’t ordinarily consist of selling, leasing, letting or hiring out such goods
- goods that you intend to re-sell or hire out unless selling or hiring is your main business activity
- goods for disposal as promotional items, gifts or donations
- any services
A word of caution: the biggest misconception around the flat rate scheme is that individuals think they can use the flat rate percentage instead of the 20% standard rate and keep the difference for themselves. This is not the case! You must charge your flat rate on the whole VAT inclusive amount, after which the ‘profit’ element goes straight back into your P&L and is chargeable to Corporation Tax.
Note: The 1% discount for the Flat Rate scheme still applies for the first year after the company has registered for VAT. If your VAT period straddles the 01-Apr-2017 change, then the new rates only apply to the period after 01-Apr-2017. For turnover before 31-Mar-2017, your normal Flat Rate % will apply.
Your accountant is probably aware of this and should have communicated the implications to you. If not, speak to us today and see how we can help.
Disclaimer – the above does not constitute advice nor must it be relied upon. You must seek full and proper advice that is applicable to your individual circumstances and correct at the time of your inquiry. Rules are always subject to change so you must never assume the information stated is the latest/most up to date.