Flat Rate Tax Scheme

Flat Rate Scheme changes taking place April 2017

There are changes afoot that will affect the Flat Rate Scheme and how effective it is is for your business to operate under this scheme. This is an IMPORTANT read if you think that you may be subject to the FRS changes, which take place from 1st April 2017.

Background to the FRS

Under the FRS a set percentage, determined by the business trade sector, is applied to the VAT inclusive turnover of the business as a one-off calculation instead of having to identify and record the VAT on each sale and purchase the business makes. Turnover will include any exempt supplies and it is therefore not generally beneficial to join the scheme where there are significant exempt supplies.

The aim of the FRS for small businesses is to reduce the administrative burden imposed when operating VAT, however many small businesses who use the scheme are also better off as they are effectively able to keep some of the VAT charged to customers.

How the scheme operates

The percentage rates are determined according to the trade sector of the business and currently range from 4% to 14.5%.

In addition there is a further 1% reduction in the normal rates for businesses in their first year of VAT registration. If a business falls into more than one sector it is the main business activity as measured by turnover which counts.

Although those operating the FRS pay VAT at the FRS percentage they are still required to prepare invoices for customers showing the normal rates of VAT. This is so that their customers can reclaim input VAT, if appropriate.

The change to the FRS

The change, described as an anti-avoidance measure, introduces a new 16.5% rate from 1 April 2017. This rate will be applicable for businesses with limited costs, such as many labour-only businesses. Businesses using the scheme, or considering joining the scheme, will need to decide if they are a ‘limited cost trader’.

The government estimate that of the 411,000 businesses using the FRS, 123,000 have limited costs and will be affected by these changes. According to the statistics produced by the government the changes which are being introduced to the FRS will result in it no longer being beneficial to some current users of the scheme.

What happens now?

The introduction of the 16.5% rate for limited cost traders will result in affected businesses having to reconsider their position and may result in different outcomes. Some businesses will:

  • continue to use the flat rate scheme, checking for each VAT return period, whether they are affected by the 16.5% limited cost trader percentage and paying VAT at the 16.5% rate if appropriate
  • decide to leave the FRS. In order to leave the FRS you must write and let HMRC know. Generally businesses choose to leave at the end of an accounting period. However, you may leave voluntarily at any time during an accounting period. HMRC will confirm the date you left the scheme in writing. If you are considering this option we can advise the most appropriate time to leave the scheme but this will generally be before 1 April 2017
  • decide to deregister for VAT where the business turnover is below the VAT deregistration threshold. A business effectively leaves the FRS the day before they deregister for VAT.

BAS Associates  can advise you of the best course of action for you and your business.

Call us now for urgent advice that may change the way your business operates regarding this scheme.