In the autumn budget, the Chancellor snuck in a change to the calculation of the Flat Rate Scheme (FRS) which means the very people it helped most are now precluded. All businesses using the FRS will have to perform an assessment to determine whether the new rules apply or not.
We’re still waiting for HMRC to issue the ready reckoner, so in the meantime, how do you figure out if a registered business needs to amend their VAT FRS percentage?
I suggest any business or contractor using the FRS should crunch the numbers to calculate their VAT liability.
There are two rules, if your VAT inclusive expenses are less than 2% of your VAT inclusive turnover you are a LCT and have to use 16.5% when calculating VAT liability. If that doesn’t catch you, think about the second rule: if the 2% calculation is less than £1,000 then you too are caught.
So what are VAT inclusive expenses? The first thing you need to work out is where do you pay VAT? Start by looking at your invoices, but be aware that not all invoices have VAT numbers so they’re all out too. Public travel generally doesn’t have VAT so that’s another major expense for most traders, and out too. Help is on hand though - conveniently HMRC also say you have to exclude capital expenditure, food and drink and anything to do with your vehicle. So that leaves your agents’ fees, accountancy charges, phone, and maybe rent?
The HMRC website is silent on what period is used to complete the calculation. We use a recent 12 month period. It’s made more difficult if you’re not using real time accounting, so what about the last set of accounts? What if that’s not representative of your current business? Whatever method is used, we always recommend you keep a record in the event of a challenge by HMRC. As HMRC see how many self-employed they catch moving forwards, I’m sure there will be more refinements.