Businesses with few VAT expenses have been able to pay HMRC a reduced output liability percentage on their Gross turnover called the flat rate scheme. This is because some businesses have very few expenses and having to pay 20% output VAT without the Input Vat to offset would appear unfair.
For example a consultancy firm may use a flat rate of 12%. They would charge the customers the full standard rate of 20% yet only pay 12% of the gross turnover in VAT to HMRC.
There were a few minor restrictions but pretty much anyone could use the flat rate scheme with an annual turnover of £150,000 or less. However HMRC have again published a consultation in December 2016 announcing plans to introduce a further restriction called “limited cost trader”.
Limited cost traders can still use the flat rate scheme, but their percentage will be 16.5%. A limited cost trader is defined as one that spends less than 2% of its sales on goods (not services) in an accounting period. It is the fact services don’t count that means many business will fall into the limited cost trader trap.
In summary if you fall into the definition of a “limited cost trader” your company or business may be better off coming out of the FRS altogether. At least using the standard scheme you can offset any services such as accountancy fees against your output vat albeit at 20% again. Each clients situation will be different. If you are concerned this will affect your business please contact us and we can provide advice and assistance in working out your status.
If we do the book keeping for your business already we will be touch when completing your VAT returns.
A note should be added that the consultation ended in late December 2016. We are yet to receive HMRC’s final rules regarding this. We will of course keep you updated via this blog, our website and clients we provide book keeping services for we shall be in touch very soon.
UPDATE: As this post described what was proposed – all of this came in to force on the 1st April 2017. Therefore is you are worried about anything here please to get in touch.
Any questions please feel free to get in touch at 01480 300945.
Richard at TG.