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The Autumn Statement included a proposal to remove the VAT saving which can be achieved by businesses which use the flat rate scheme (FRS).
In 2002 HMRC hailed the introduction of the flat rate scheme (FRS) as a simplification of the VAT system which would reduce admin. But in practice the advantage is negligible, and despite HMRC’s protest to the contrary, the real incentive to use the FRS is that it can save you money. The bad news is that measures announced in the 2016 Autumn Statement aim to block this.
A new class of FRS business
From 1 April 2017 all businesses which use the FRS will be required to check if they are a ''limited cost trader". If so, they must use a 16.5% FRS rate. The effect will be to virtually wipe out any VAT saving or possibly leave businesses worse off than had they not used the FRS at all. Businesses that offer personal services, e.g. consultants, are the most likely to be affected by the new rules.
What's a limited cost trader?
A limited cost trader is one whose VAT-inclusive expenditure on goods is either:
When testing if either of the 2% or £1,000 conditions apply the VAT paid on certain types of purchase must be ignored. Examples are:
For VAT return periods starting on or after 1 April 2017, if your purchases are less than 2% of your turnover, or proportionately less than £1,000 per year, you'll be required to use a FRS rate of 16.5%. Instead you'll probably be better off leaving the scheme before the start of your first VAT period after 1 April 2017.
If you would like further information on the flat rate scheme or how these changes will affect your business, please contact the Sence Team on 01530 267 320 or email firstname.lastname@example.org
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