HM Revenue & Customs (HMRC) have written to most small businesses that will be affected by the changes to the VAT Flat Rate Scheme (FRS) coming into effect on 1 April.
The FRS is an alternative way for small businesses to work out how much VAT to pay each quarter and is designed to save them time by simplifying the manner in which their VAT returns are completed.
However, a new flat rate of 16.5 per centwill apply from 1 April to businesses with limited expenditure. The new rate was introduced to combat misuse of the scheme but will also hit innocent businesses which qualify as “limited cost traders” with the result that they will be required to use the 16.5% rate when they may previously have been entitled to use a much lower rate
A limited cost trader is one whose VAT-inclusive expenditure on goods is either less than 2 per cent of its VAT-inclusive turnover in a prescribed accounting period or if its expenditure on goods is more than 2 per cent of its VAT-inclusive turnover but less than £1,000 a year.
Ordinarily, the flat rate percentage varies from sector to sector, so the flat rate for a clothes shop would be 7.5 per cent, while for a detective agency it is 12 per cent. There are also complications on exactly which income the rate should apply to.
Businesses using (or intending to use) the FRS who are unsure whether the new 16.5% rate will apply should seek professional advice as should those businesses which are unsure whether the scheme will be appropriate to them or not.