VAT Flat Rate Scheme Changes

HMRC have recently announced a change to the VAT flat rate scheme (FRS) which will affect the majority of freelancers.

On the 1st April 2017, a new rate of 16.5% is being introduced for businesses classed as “limited cost traders”.

Full details of the changes have not yet been announced as HMRC’s consultation period has only recently finished.

Which businesses are affected?

“Limited cost traders” are businesses who’s 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 (pro rata)
  • Goods, for the purposes of this measure, must be used exclusively for the business (i.e. not including anything partly used for private purpose). HMRC give the example of printer ink and stationery that you use for your office and home!

There are other exclusions too as follows:

  • Capital expenditure;
  • Food or drink for consumption by the flat rate business or its employees;
  • Vehicles, vehicle parts and fuel (except where the business is one that carries out transport services – for example a taxi business – and uses its own or a leased vehicle to carry out those services);
  • Goods acquired with the intention of giving them away or donating them to a third party.

These exclusions have been included in the new rules to prevent businesses buying either low value everyday items or one off purchases to inflate their costs beyond the 2% and avoid the increased rate.

HMRC have said it will support businesses in checking their on-going and perhaps ever-changing status as limited cost traders by introducing an online tool.

What is Tempo doing to help?

We are reviewing which clients require the change to their FRS scheme and indeed who of these will be better off coming off of the FRS. The process will happen later in March, hopefully by then HMRC will have clarified the situation.