VAT Flat Rate Scheme – The New Rules from 1 Apr 2017

The VAT Flat Rate Scheme changes from 1 Apr 2017 when new rules come into force in a heavy handed attempt to combat abuse of the system. The FRS differs from standard VAT accounting because you pay a percentage of your business turnover rather than paying the actual VAT arising on the difference between sales and purchases.

You continue to charge clients the headline rate of 20% VAT and you can potentially benefit by remitting a smaller percentage to the taxman. The FRS rates differ from sector to sector, but for IT contractors the norm used to be a rate of 14.5%. That’s changing to 16.5%.

Generally speaking, the new rules are awful! If you want to see what HMRC said about this (in Nov 2016) the press release and draft legislation are here.

Let’s consider three examples of a software developer with net annual sales of £50,000 and net VATable costs of £5,000.

 

Standard VAT

accounting

Old FRS Rules

2002 – 2017

New FRS Rules

2017 et seq

Sales

50,000.00

50,000.00

50,000.00

VAT

10,000.00

10,000.00

10,000.00

Total

60,000.00

60,000.00

60,000.00

Gross sales

60,000.00

60,000.00

VAT Flat rate

14.5%

16.5%

VATable costs

5,000.00

VAT

1,000.00

Total

6,000.00

VAT in

10,000.00

VAT out

(1,000.00)

HMRC remittance

9,000.00

8,700.00

9,900.00

“Standard” variation

NIL

£300 better off

£900 worse off

 

Double those annual sales to £100,000 (some of our clients operate at that level) and you can see that the difference could be either £600 better off or £1,800 worse off.

And do the sums the other way around, under the new FRS rules the VAT of £9,900 represents a rate of 19.8% on the sales of £50,000. That’s a bit like saying “pay all the VAT to HMRC and claim back practically nothing”. This makes the new Flat Rate Scheme nigh on useless!

You may suggest that the software developer in the example should simply deregister because the sales of £50,000 are below the VAT registration threshold of £83,000. Yes, that’s true. And then the VAT recovered would be NIL (instead of getting £1,000 back) and so the business would still be worse off, but to a greater extent!

Wiggle Room

There is not much wiggle room, unless you incur a reasonable amount of cost on “relevant goods”. The new rules are designed to impair only “limited costs” traders. That’s nearly everyone! However, try out the formula below to see if you can escape being labelled as a “limited costs” trader. This calculation has to be done every VAT quarter (so you may find that you alternate between FRS Old Rules and FRS New Rules).

The Formula

Work out your total for VAT inclusive sales.

Calculate a figure for 2% of your VAT inclusive sales.

Work out your total for VAT inclusive costs on “relevant goods”. Goods are tangible things, so be sure to ignore costs for services like office rent, freelance workers, accountants, insurance, travel, telephone calls, etc.

For the purposes of the VAT FRS rules (unless you’re a retailer of these goods) the expression “relevant goods” excludes the following:

  • Items of a capital nature
  • Cars
  • Computers
  • Printers
  • Scanners
  • Mobile phones
  • Furniture, etc
  • Fuel for motor vehicles
  • Spare parts for motor vehicles
  • Food
  • Drink
  • Anything which has a dual personal/business use (like bicycles and parts for their upkeep)

Question 1

Is your expenditure on “relevant goods” less than £250?

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