Restrictions for the use of VAT Flat Rate Scheme

The flat rate scheme is used by many small to medium sized businesses to simplify their VAT reporting. Many of those businesses enjoys a cash advantage from using this scheme. However, this advantage is due to be cut back significantly from 1 April 2017. The FRS will continue but many businesses will not find it economical to use.

When using the VAT flat rate scheme the business ignores VAT incurred on purchases when reporting VAT payable, with the exception of capital items that cost £2,000 or more. The business just multiples the gross turnover (including VAT charged at the normal rates) by the flat rate scheme percentage set for his particular trade sector.

If the business incurs expenses, and it operates using the flat rate scheme for VAT reporting, it will pay out less VAT to HMRC under the flat rate scheme than it would outside the scheme. Many businesses register for VAT voluntarily before their turnover reaches the VAT registration threshold, so they can use the FRS and bank the cash advantage.

The government believes small businesses have been abusing the flat rate scheme, so it is changing the terms of the scheme to make is less attractive to use, and to reduce the cash advantage enjoyed by service-related businesses. From 1 April 2017 a business will be required to use a flat rate scheme percentage of 16.5% if it is a “low cost trader”. This likely to adversely affect businesses in majority of the trade sectors trade sectors on the flat rate scheme.

If you are a small business and registered for VAT contact KVS accountants based in Fulham for advice on VAT, preparation of VAT returns and filing VAT returns to HMRC.

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