Proposals were made in the Autumn Statement to amend the Flat Rate VAT Scheme (FRS) which have now been finalised by HMRC and will affect our clients who have a very low cost base.

The definition of a limited cost trader is a business that spends less than £250 or 2% of its sales on relevant goods (note not services) in a VAT quarter. Goods include stock to sell, ink cartridges and stationery and gas and electricity which is used exclusively for the business.

The following will all be excluded from the relevant goods calculation:

  • Any services – which is anything that isn’t goods
  • Food and drink for employee consumption,
  • capital purchases,
  • vehicle costs including fuel unless you’re in the transport business,
  • using your own, or a leased vehicle
  • rent, internet, phone bills and accountancy fee
  • training and memberships
  • promotional items
  • advertising
  • digital subscriptions
  • expenses like travel and accommodation
  • If clients meet the limited cost trader definition then they must pay over 16.5% of their gross turnover each quarter instead of the 12-14.5% most pay now.

Options for clients include:

  • Deregistering for VAT if turnover is below £81,000
  • Moving to the “actual” method instead of FRS
  • Remaining at FRS but paying over 16.5%

Note that the 1% discount will still apply if you are in your first year of VAT registration.

There is now an online HMRC checker (still in beta as at 1/3/17) which you can use to assist in deciding if you are a low cost trader or not.

This takes effect from 1/4/17, so please contact us to discuss things further if you think you will be affected.