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Autumn Statement 2016 summary - VAT flat rate scheme restricted

The VAT flat rate scheme (FRS) is used by many small businesses to simplify their VAT reporting, and most of those businesses also gain a cash advantage from using the scheme. When using the FRS the trader simply multiplies his gross turnover (including VAT charged at the normal rates) by the FRS percentage set for his particular trade sector.

The Government believes that some businesses have been abusing the FRS by not using it as the law intended, so is curtailing the cash benefit of the scheme for "low-cost traders." These businesses will have to pay VAT to HMRC calculated at 16.5% of their gross sales, rather than using the FRS percentage relevant to their trade sector (typically 12% to 14.5%).

A low-cost trader is one whose expenditure on goods (not services) is less than 2% of their gross turnover, or if more than 2% of turnover, the amount spent on goods is less than £1,000 per year. Any expenditure on; capital items, motor expenses, or food or drink for consumption by the business, is ignored when working out the 2% or £1,000 threshold.

This emphasis on goods will discriminate against businesses in the knowledge and service support sectors whose purchases are largely services such as: rent, software licences, IT support, digital journals, sub-contractors and telecoms.

If your business is using the FRS but your turnover is less than the VAT threshold of £83,000 you may want to deregister from VAT with effect from 1 April 2017. If your turnover is higher than the VAT threshold, you may want to withdraw from the FRS from the same date. We can advise you on the best option for your business.

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