For years contractors and small businesses have been using the VAT flat rate scheme (FRS) to calculate the VAT to be paid to HMRC. The huge advantage was it was simple and there was an added benefit if you didn’t have much VAT to claim on purchases.
In the Autumn budget in Mid November 2016 the Chancellor snuck in a change to the calculation of the FRS precluding the very people it helped most. All businesses using the FRS will have to perform an assessment as to whether the new rules apply or not. In a nutshell if you have vatable expenditure of less than 2% of gross income you can only use the FRS rate of 16.5% irrespective of the type of business. The nice people at HMRC will have an on-line tool to help us though this isn’t available until January. Don’t think you can include capital expenditure or one off costs. The calculation of 2% only relates to everyday costs.
Contractor on the FRS using a rate of 14.5% will be paying £14.50 to HMRC for a gross invoice of £100 (£83.33 + £16.67 VAT). Assuming no vatable purchases saving of £2.17 per £100. Under the new scheme the contractor will be defined as a “limited cost trader” and will have to pay £16.50 on the same invoice to HMRC, that’s 17p you’ve just saved.
Of course you can transfer to the standard calculation and as long you only reclaim VAT on the applicable invoices all fine, you do know what they are don’t you?
Anyone on the FRS have a couple of months to get their house in order as the new rules are due to take effect from April 2017.