We are not suggesting that HMRC are making up the rules as they go along, but their webinar on the flat rate scheme (FRS) included an additional condition, which isn’t in the new version of the FRS leaflet (Notice 733).
Limited cost traders (LCT) must use a FRS percentage of 16.5%, rather than the normal flat rate for their trade sector. To avoid being categorised as a LCT, the business must purchase at least £250 of relevant goods in the VAT period, and the value of those goods must also be equal to or exceed 2% of the gross sales for the same period.
The draft legislation excludes the following from “relevant goods”:
- Capital items (which HMRC say is anything expected to have a useful life of more than one year).
- Road fuel and motor parts (except for businesses in the transport sector e.g. road haulage and hire cars).
- Food and drink for employees and business proprietor.
- The three new exclusions from relevant goods are:
- Goods for resale, leasing, letting or hiring out if the main business activity doesn’t ordinarily consist of selling, leasing, letting or hiring out such goods.
- Goods that the trader intends to re-sell or hire out, unless selling or hiring is the main business activity.
- Goods for disposal as promotional items, gifts or donations.
The first two bullet points are set out in paragraphs 4.4 to 4.6 of the latest version of Notice 733, but the third one was announced in the HMRC webinar on 1 March 2017.
The new conditions are designed to prevent businesses buying goods, which are not related to its main trade, just to avoid being categorised as a LCT. These new rules may generate lots or arguments about what is the trader’s “main business activity”. Our office will be happy to discuss how these new conditions will apply to you.
Written by the Tax Advice Network