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Advice for VAT Flat Rate Scheme Changes coming in April 2017

Short Answer

If you spend less than £1,000 per year on physical goods you will probably be better off outside the VAT Flat Rate Scheme and on the standard VAT scheme from 1 April 2017.

Note – This advice is based on the HMRC Guidance published on 5 December 2016. These changes are not yet law and may be revised prior to adoption on 1 April 2017.

In the Autumn 2016 Budget the Government announced a surprise change to the VAT Flat Rate Scheme (“FRS”). Assuming it goes ahead, this page helps FRS users quantify the cost to them and whether they should move off the VAT FRS.

The change announced

The new changes introduce a 16.5% VAT Flat Rate Scheme rate for companies that fit the following criteria:

VAT inclusive expenditure on goods is either:
– less than 2% of their VAT inclusive turnover in a prescribed accounting period
– greater than 2% of their VAT inclusive turnover but less than £1000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000)

HMRC describes such companies as ‘limited cost traders’. The definition of goods is itself pretty restricted and does not include:

  • – Capital Expenditure (i.e. assets like a laptop)
  • – Lunch expense claims
  • – Vehicle and travel costs
  • – Any non-physical services such as accounting fees or software

This means pretty much all Limited Company contractors will be deemed ‘limited cost traders’ and will move to the 16.5% rate.

Our FRS Calculator

16.5% VAT Flat Rate Scheme Calculator

Find out how the changes to the VAT Flat Rate Scheme will effect you.

Enter your monthly sales and UK purchases (overseas purchases should be ignored) excluding VAT.

Monthly sales excluding VAT?:
Monthly purchases of goods (e.g. stationary & stock to resell) excluding VAT?:
Monthly purchases of services (e.g. accounting fees & software) excluding VAT?:
Current VAT FRS Rate (e.g. 14.5%):

The standard VAT scheme

What should I know about the standard VAT scheme?

The VAT standard VAT scheme works in a different way to the FRS. Whereas the FRS only looks at the sales made when calculating the VAT owed, the standard scheme looks at both sales and purchases.

This means bookkeeping (ie. updating Xero) on the purchase side will be more important. All expenses must be given an accurate ‘tax rate’ (the words that Xero use for VAT) and you must keep copies of all expense invoices in case HMRC ever asks to see them. The best way to do this is to upload a good quality photo of the invoice or receipt into Xero. It should always be a VAT receipt clearly showing the amount of VAT on it.

How do I change to the standard VAT scheme?

To come off the FRS and onto the standard scheme a letter needs to be sent to HMRC. Your Caprica accountant can do this for you, just let them know.

The change can normally be done within a month or two however HMRC are likely to get a backlog as the new changes come through and more companies seek to change scheme.

Should I de-register for VAT altogether?

If your customers/clients are themselves VAT registered businesses you will nearly always be better off registered for VAT. You can read more on that here.