FLAT RATE VAT SCHEME CHANGES: LIMITED COST BUSINESSES

Announced in the Autumn Statement was the proposed change to the Flat Rate VAT Scheme. Little detail was provided at the time, and the terminology in the announcement was rather vague. This official notice has now been published and the changes will take effect from 1st April 2017.

As with the changes in Dividend rules from last April, I write this guide as matter-of-factly as I can and with the caveats of “don’t shoot the messenger” and “we don’t write the rules”.

What are the changes?

Under the current rules of the Flat Rate Scheme (FRS), the VAT you pay is calculated as:

• Gross Sales x FRS %

You will all have a sector specific FR %, ranging from 4% to 14.5%. This is reduced by 1% for your first year of registration, and you can also claim VAT back on any Capital Expenditure of over £2,000.

The new rules state that if you are a limited cost business you should use the flat rate of 16.5%.

What is a limited cost business?

Defined as:
You’re a limited cost business if the amount you spend on relevant goods including VAT is either:
• less than 2% of your VAT flat rate turnover
• greater than 2% of your VAT flat rate turnover but less than £1000 per year

If your return is less than one year the figure is the relevant proportion of £1000. For a quarterly return this is £250.

This may not be clear for all businesses, and for all FRS businesses, this test should be performed each quarter. You can be a limited cost business in one quarter (and use 16.5%) and if in the next quarter you don’t meet the criteria you can use your normal percentage.

Examples of test:

Example 1
A business has a flat rate turnover of £10,000 a quarter. It spends £260 on relevant goods.
This is more than 2% of the flat rate turnover and more than £250 so the rate they need to use is the sector rate for their business.

Example 2
A business has a flat rate turnover of £20,000 a quarter. It spends £325 on relevant goods.
This is more than £250 but less than 2% of the flat rate turnover so the rate they need to use is 16.5%.

Example 3
A business has a flat rate turnover of £10,000 a quarter. It spends £225 on relevant goods.
This is more than 2% of the flat rate turnover but less than £250 so the rate they need to use is 16.5%.

The new rules come in on 1st April. If your VAT quarter straddles the start of the new rules, the current FRS % will apply to transactions up to 31st March, and then the test will be applied to rest of the quarter post 1st April.

What are relevant goods?

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.

Relevant goods are goods that are used exclusively for the purposes of your business, but don’t include:
• 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
• any services

Examples of relevant goods: This isn’t an exhaustive list:
• stationery and other office supplies to be used exclusively for the business
• gas and electricity used exclusively for your business
• fuel for a taxi owned by a taxi firm
• stock for a shop
• cleaning products to be used exclusively for the business
• hair products to use to provide hairdressing services
• standard software, provided on a disk

Examples of supplies that aren’t relevant goods. This isn’t an exhaustive list:
• accountancy fees, these are services
• advertising costs, these are services
• an item leased/hired to your business, this counts as services, as ownership will never transfer to your business
• food and drink for you or your staff, these are excluded goods
• fuel for a car this is excluded unless operating in the transport sector using your own, or a leased vehicle
• laptop or mobile phone for use by the business, this is excluded as it is capital expenditure
• anything provided electronically, for example a downloaded magazine, these are services
• rent, this is a service
• software you download, this is a service
• software designed specifically for you (bespoke software), this is a service even if it is not supplied electronically

Other points
• VAT can still be reclaimed on capital expenditure of over £2,000.
• The first year 1% reduction in the FRS % still applies and will also apply to the 16.5% if you are still within your first year of registration.

How will this affect my business?

This will vary from client to client, with the main factors being what your current FRS% is, and what level of purchases and services you have.

Over the next few weeks the managers at Burton Beavan will be working through all our FRS VAT registered clients and assessing and informing you of the impact of these changes. We will also at that stage advise as to whether the FRS is still suitable, or whether changing to the Standard scheme would be more beneficially.

Please note that each manager will be working through many clients, all with different circumstances, so please don’t panic if you don’t hear from your manager immediately, you will all be getting a personalised calculation sent to you showing the impact prior to 1st April. Our primary focus will be the clients that we complete the bookkeeping and file VAT returns for, if you are a client that we are not engaged with to provide those services we will still assess the changes for you if you request us to do so.

Regards,

NEIL