Since we last wrote about the VAT flat rate scheme (FRS), the rules have been amended to make it even more difficult for traders to avoid the 16.5% flat rate. To fall outside that category the trader must spend 2% or more of his gross turnover and at least £250 per quarter on “relevant goods”.
Regulations passed on 8 March 2017 exclude from relevant goods any goods which are not used exclusively for the business, and all of the following:
- vehicles, vehicle parts and fuel except where the trader is in the transport sector owns or leases a vehicle for his business;
- food or drink for consumption by the trader or his employees;
- capital expenditure (of any value);
- goods acquired for the purpose of resale, leasing, letting or hiring out except where the main business activity trader ordinarily consists of selling, leasing, letting or hiring out such goods;
- goods for disposal as promotional items, gifts or donations.
The VAT notice: 733 has been updated for the new FRS rules, but it doesn’t include the last bullet point above.
Taken together, a trader whose main business is the provision of services is unlikely to meet the 2% threshold, so will want to leave the flat rate scheme before 1 April 2017. Where the predicted turnover of the next 12 months is £83,000 or less, the trader may well wish to cancel his VAT registration to completely avoid VAT administration. This will give a limited company the added advantage of delaying MTD quarterly reporting until its accounting period that begins on or after 1 April 2020.
We can cancel a VAT registration on behalf of our client, and the easiest way to do this is online. The cancelation can’t be backdated for a business that continues to trade, so we need to make sure this is done before Friday 1 April 2017. The logical date to pick for deregister is 31 March. If the trader is in the FRS, he is deemed to leave that scheme the day before VAT registration is cancelled (VAT Notice 733, para 12.4), so on 30 March for a 31 March deregistration.
We will advise our client to issue any outstanding invoices by close of business on 30 March. Business-related purchases on 31 March will fall inside normal VAT accounting, and outside the FRS, so VAT can be reclaimed on those items. Once the trader is deregistered from 1 April onwards, he won’t be able to reclaim VAT on any purchases and must not charge VAT on his sales.