Changes to the Flat Rate VAT Scheme are coming - are YOU ready?

In less than two weeks, changes to the Flat Rate VAT Scheme will come into force, which will affect almost all Limited Company contractors. 

In this blog, we take a look at what these changes are, and what can you do to calculate the effect it will have on you.

The Flat Rate VAT Scheme (FRS)

The FRS was designed to simplify VAT for businesses with an expected turnover less than £150,000 (£180,000 including VAT). Many contractors use FRS for its simplicity, but also because the financial benefit is greater than using the standard method.

How does it currently work?

VAT is added to your invoices to clients, typically at 20% on the value of your services. But then, instead of reducing that VAT received from your clients by the VAT you incur on expenses, and paying the net amount to HMRC, you simply pay a fixed percentage of the VAT inclusive turnover. The percentage adopted for this depends on selecting an FRS category that best suits your business activity.

Although the FRS was originally designed to be a simplification of the administrative process and not provide a financial benefit, for many contractors the amount of VAT retained is higher than actually incurred.

So why is there any change?

Sadly, the FRS has become the target of abuse and has become a means to compensate for the loss of tax relief on expenses by former Umbrella workers. HMRC has acted quickly to counteract the actions of this abuse and imposed changes that remove that benefit.

What do those changes mean?

From 1 April 2017, a new Flat Rate percentage of 16.5% has been introduced. This percentage overrides the existing FRS category percentage rate used, but only when a business falls within a wholly new Limited Cost Trader (LCT) definition.

To explain, if your business has adopted the “Computer and IT Consultancy and Data Processing” category you would normally apply the flat rate of 14.5%. Under the new rules, for a VAT quarter where you meet the meaning of LCT, the 14.5% is replaced by 16.5%.

What is a Limited Cost Trader?

An LCT is a business that incurs expenditure during a VAT Return period on Relevant Goods less than the greater of:

a) £1,000 per annum (pro rata for the duration of a VAT period) and

b) 2% of VAT inclusive turnover for that period.

If you adopt quarterly VAT Returns this is considered at the end of every VAT quarter, if you adopt the Annual Accounting method then it is assessed at the end of the full year.  If you adopt the cash accounting basis rather than the invoice accruals basis then the turnover considered is the VAT inclusive value of any cash received in the VAT period.

How does this work for VAT Return periods ending in April 2017 or May 2017?

If you are an LCT for any quarter that includes April 2017 then your VAT liability will use the normal category percentage for periods prior to 1 April 2017 and the new 16.5% rate for the period from 1 April 2017.

Should I reassess my VAT periods?

There is no benefit to changing your VAT periods just for the sake of it. More information about this is available in our free ebrief.

What are Relevant Goods?

Purchases will fall within one of two categories known as Goods or Services. Goods tend to be tangible, moveable items, where title or ownership physically passes from one to another. Services are everything else.

For LCT purposes, Relevant Goods are goods that are used only for the purposes of your main business activity and they exclude costs that are personal or partially so. For examples of relevant and non relevant goods, and also an easy-to-use infographic on how you can tell whether a specific good is relevant, download our free FRS ebrief.

What are your options?

You can deregister from VAT, switch to the Standard Scheme, or remain in the Flat Rate Scheme. Download our free FRS ebrief to understand the effects each option will have.

How Intouch Accounting can help

Our team of Personal Accountants are currently providing expert tailored advice to their clients, regarding which scheme will provide the best outcome for them. If this sounds like the type of support you need, get in touch today, or for our full coverage of the FRS changes with working examples, download our free ebrief.