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VAT FRS - Punctured Or Just Flat?

17 January 2017

Among the various VAT schemes available to smaller businesses, it's fair to say that the most popular in recent years has been the Flat Rate Scheme (FRS). This allows a trader, with annual VATable turnover of no more than £150,000, to join the Scheme and to account for VAT using a simple calculation based on a specified percentage of turnover – that percentage determined by the industry sector.

When FRS was introduced, the industry sector percentages had been calculated by the Treasury such that, overall, businesses adopting FRS would pay the same amount of VAT to HMRC that they would have paid under normal accounting. However, in our experience, the majority of traders find that they're paying less VAT under FRS – a saving that was presumably never intended, but nevertheless contributing to the Scheme’s popularity. Such savings are usually modest but, as is always the case, where an opportunity to save tax is identified there are those that will seek to abuse the facility.

In his 2016 Autumn Statement, the Chancellor announced proposals to tackle such abuse, introducing a new percentage (16.5%) for ‘low-cost traders’, in other words, those traders that spend less than 2% of their turnover (or £1,000 per year, if greater) on goods for the business.

Whilst the proposed change is directed at those deliberately abusing FRS, it will – as is so often the case – have a much wider impact. In particular, it is likely to affect most one-man consultancy companies that tend to incur little in the way of goods for their business. The test is by reference to goods, as opposed to services, and excludes certain items such as fuel, food and drink.

So what does this mean? We don’t exactly know as there is ongoing consultation on the detail. But it's likely that many FRS users will need to consider whether or not it will be worthwhile remaining in the Scheme, particularly if they would end up paying more VAT than under normal accounting. However, there's no need to rush out and change the wheel just yet – once the final legislation is known, it may be possible to take steps to mitigate its impact and we will be advising on this in due course. If you have any questions in the meantime, please contact dlochhead@springfords.com.

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