VAT Flat Rate Percentage

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VAt Flat Rate

HMRC VAT flat rate scheme

HMRC recently came up with a new rule for those businesses who have been using  VAT Flat Rate Scheme(FRS).

From now on limited cost traders (LCT) must use an FRS percentage of 16.5%, rather than the normal flat rate for their trade sector. To avoid being categorized as an LCT, the business must purchase at least £250 of relevant goods in the VAT period, and the value of those goods must also be equal to or exceed 2% of the gross sales for the same period.

The draft legislation excludes the following from “relevant goods”:

  • Capital items (which HMRC say is anything expected to have a useful life of more than one year).
  • Road fuel and motor parts (except for businesses in the transport sector e.g. road haulage and hire cars).
  • Food and drink for employees and business proprietor.
  • The three new exclusions from relevant goods are:
  • Goods for resale, leasing, letting or hiring out if the main business activity doesn’t ordinarily consist of selling, leasing, letting or hiring out such goods.
  • Goods that the trader intends to re-sell or hire out, unless selling or hiring is the main business activity.
  • Goods for disposal as promotional items, gifts or donations.

The first two bullet points are set out in paragraphs 4.4 to 4.6 of the latest version of Notice 733, but the third one was announced in the HMRC webinar on 1 March 2017.

If you’re a limited cost trader (LCT) this means that you may pay more VAT than you do on standard accounting – you may want to check to make sure the Flat Rate Scheme is still right for you.

Example 1

A business has a flat rate turnover of £10,000 a quarter. It spends £260 on relevant goods.

This is more than 2% of the flat rate turnover and more than £250 so the rate they need to use is the sector rate for their business.

Example 2

A business has a flat rate turnover of £20,000 a quarter. It spends £325 on relevant goods.

This is more than £250 but less than 2% of the flat rate turnover so the rate they need to use is 16.5%.

Example 3

A business has a flat rate turnover of £10,000 a quarter. It spends £225 on relevant goods.

This is more than 2% of the flat rate turnover but less than £250 so the rate they need to use is 16.5%.

 

The new conditions are designed to prevent businesses buying goods, which are not related to its main trade, just to avoid being categorized as an LCT. These new rules may generate lots or arguments about what is the trader’s “main business activity”. Our VAT experts will be happy to discuss how these new conditions will apply to your business.

Do not hesitate to contact Small Business Accountant if you have any question regarding VAT Flat Rate Scheme. Please call us on 02070784371.