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VAT flat rate scheme made easy

What is it? 

A simplified 16.5% VAT flat rate scheme for small businesses has been introduced in the 2016 Autumn Statement.

The VAT flat rate scheme, or FRS, is an attempt to simplify the VAT accounting scheme for businesses with limited costs. This will take effect on the 1st April 2017.

VAT flat rate scheme

FRS businesses will need to make sure they meet the definition of a ‘limited cost trader’.

We pulled this definition from the HMRC page:

“A limited cost trader will be defined as one whose 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)”

VAT to HMRC is now a fixed rate instead of depending on the difference between VAT charged by the business and the VAT the business pays on their own purchases.

This means you can keep the difference between what you charge and what you pay!

Businesses can no longer reclaim VAT on purchases except for certain capital assets over £2,000 (see the HMRC website for more details).


How do I join?

You are eligible if you are a VAT registered business with a taxable turnover of £150,000 or less (excluding VAT) in the next 12 months.

You can join online or by post when you register for VAT.

You cannot join if you have:

  • Committed a VAT offence in the last 12 months
  • Joined a VAT group in the last 24 months
  • Joined a marginal or capital goods VAT scheme

To help work out eligibility a draft secondary legislation was published 5th December, find it here.


What if I don’t want it? 

You can leave at any time by writing to HMRC and they will confirm your leaving date.

Bear in mind you cannot rejoin within 12 months.


How much will I pay?

The VAT flat rate percentage is a percentage of your flat rate turnover.

The VAT flat rate depends on your business type, so if the rate changes you must apply to a new rate from the get-go.

Here is an example from HMRC website:

 “You bill a client for £1,000, adding VAT at 20% to make £1,200 in total.

You’re an IT consultant, so the VAT flat rate for your business is 14.5%.

Your flat rate payment will be 14.5% of £1,200, or £174.”


What does the VAT flat rate scheme mean for me?

Contractors with high outlays for services could switch to a standard VAT accounting scheme due to the rise in rates from 14.5% to 16.5%, however this could result in little benefit.

Consult your accountant for advice.

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