Changes to VAT Flat Rate Scheme (FRS)

From April 2017, a new VAT flat rate of 16.5% was introduced by HMRC to Limited Cost Traders. The VAT bill of some labour only contractors will increase.

1. What is a Limited Cost Trader?

Whose VAT inclusive expenditure on goods is either:

  • Less than 2% of VAT inclusive turnover
  • Less than £1000

  • Expenditure on goods includes:

  • Goods for sale
  • Office supplies
  • Utility charges
  • Cleaning fees

  • Expenditure on goods DOES NOT include:

  • Service fees, including accountancy fees, solicitor fees, consultancy fees, etc.
  • Capitalised expenditure
  • Other, including food and drinks, vehicle related expense such as fuel and repairs, advertising costs

  • 2. Will this change affect me?

    Yes, if your main expenditure is a labour or service instead of goods. Typical Limited Cost Traders include solicitors, consultants, IT contractors, hairdressers and cleaners.

    For example, if your annual VAT inclusive turnover is £120,000:

    Before the change: VAT due to HMRC = £120,000 x 14.5% = £17,400

    After the change: VAT due to HMRC = £120,000 x 16.5% = £19,800

    Therefore, if your business can reclaim £200 on business expenses (including service fees), you may be better off if you switch to the standard rate VAT scheme.

    3. What shall I do?

    De-register for VAT, if your turnover is less than £85,000 (2017/18).
    Switch to standard rate VAT scheme, if the earlier example applies to you. Contact us now to have an assessment.


    The above information and calculations are for illustrative purposes only. No liability is accepted by O’Brien S & Co Ltd for any actions or losses from investment in reliance on the information and calculations. Consult a qualified professional financial advisor before making any financial decisions. O’Brien S & Co Ltd holds the copyrights in all materials on the website. All rights reserved.

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