Death knell for the VAT Flat Rate Scheme?

23 February 2017

Chancellor Hammond, in his first and last Autumn Statement, continued with the anti-avoidance theme of recent pronouncements, by stating that ‘We will shut down inappropriate use of the VAT Flat Rate Scheme (FRS) that was put in place to help small businesses.’

Having waited for the meat on this particular bone, it transpires that the upshot is now known as the ‘Limited cost traders’ rules (LCTs). Basically, if a trader satisfies certain conditions in connection with the expenditure they incur on cost of goods within a return period, then they are an LCT. If they are within the FRS, then irrespective of what category the trader falls into with regard to job description, they will automatically have to apply 16.5% as the appropriate flat rate.

You are an LCT, if:

  1. You notify Customs that you wish your business to be within the FRS; and
  2. You incur costs on goods of:
  • less than 2% of your gross turnover; or
  • more than 2% but less than £1,000 (or the appropriate   proportion of £1,000 for a return period of less than a year – £250 for a standard quarterly return).

It is important to note that this is only goods, not services. Other exclusions include: capital expenditure goods, food or drink for consumption by the FRS business or its employees, vehicles, vehicle parts and fuel (unless the business carries out transport services) and anything that is not exclusively incurred for business purposes.

Does this announcement sound the death knell for FRS? Most probably not, but it does make it less attractive to certain businesses who may have previously gained under FRS and who will now not gain as much!

If you have any questions about the changes to the VAT Flat Rate Scheme and how it might affect your business, please contact me or your local UHY adviser.