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.



    Disclaimer:

    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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