We outlined the proposed changes to the VAT flat rate scheme (FRS) in our newsletter on 1 December 2016. Since that date HMRC has published the draft regulations to bring about this change (see below).
We now know that traders who use the FRS will have to test whether they fall within the conditions for a limited cost trader every time they submit a VAT return. For those who submit quarterly returns, and don’t use the VAT annual accounting scheme, this will be a quarterly test rather than an annual one.
In brief, the trader needs to check whether the value of the goods he purchased in the quarter is at least £250, and is also equal to or exceeds 2% of his gross sales for that same quarter. HMRC has promised to make available an online tool to help traders work out these figures, but it hasn’t been released yet. The value of goods cannot include capital times, food and drink for employees or the proprietor, or motoring expenses, unless the trade is a taxi or car hire business, when fuel and car repairs are permitted.
We will need to review all of our clients who use the FRS, to estimate (based on previous purchases) whether they are likely to be limited cost traders, and thus required to use a FRS percentage of 16.5%. This high percentage will wipe out the financial advantage of using the FRS. The simplification of VAT administration, which was the stated aim of the FRS, will be removed by the limited cost trader test described above.
For many FRS users, who are trading under the VAT deregistration threshold (£81,000), it may make sense to cancel their VAT registration. A deregistration application will be required for those clients, to take effect from 1 April 2017. However, before we deregister those smaller traders, we will check whether they need to be VAT registered for the VAT MOSS rules.
Written by the Tax Advice Network