Proposed changes to the VAT flat-rate scheme (FRS) come into force on 1 April 2017, which will see some businesses under the limited cost trader category seeing a hike in their VAT. If you’ve spotted a hike in your VAT contact your accountants in Bolton for VAT advice.
The new rules will catch any VAT-registered businesses that use the FRS and spend less than £250 per quarter, or 2% of their total sales on ‘relevant goods’.
Relevant goods are items such as stationery, stock, gas/electricity used exclusively for the purposes of your business but broadly don’t cover costs of fuel, food/drink, capital expenditure or any services.
Businesses operating under the FRS currently apply a flat-rate percentage to their VAT inclusive turnover, which varies depending on the type of business/ its costs – the highest rate being 14.5%.
If caught under the new rules, a business will no longer apply the usual rates, but will need to apply a higher rate of 16.5%, therefore will pay more VAT to HMRC.
Reacting to the new rules, businesses are looking to counter it by either leaving the FRS on 31 March and reverting to normal VAT accounting (output tax less input tax), or if their annual taxable sales are less than £81,000 and they’re unable to claim input tax, understanding the potential benefits of deregistering for VAT.
It’s fair to say that the chances of most service businesses finding enough relevant goods to pass the 2% test and avoid the 16.5% rate will be minimal. However suppliers of relevant goods may well see an increase in sales as some attempt to avoid this new category.
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