Changes to the VAT Flat Rate Scheme

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The VAT Flat Rate Scheme (FRS) is a simplified scheme used by small businesses.

The amount businesses pay to HMRC, per quarter, is usually the difference between the VAT charged to customers and the VAT businesses reclaim on purchases.

When using the Flat Rate Scheme businesses pay a fixed rate of VAT to HMRC; businesses keep the difference between what is charged to customers and paid to HMRC; businesses cannot reclaim VAT on purchases, unless the asset is over £2,000 (including VAT).

In order to join the Flat Rate Scheme businesses must have a turnover of £150,000 or less (excluding VAT).

Once in the scheme a business may continue to use it until its total business amount exceeds £230,000.

Currently businesses pay a fixed rate of VAT depending on their trade sector, the percentage varies between trades.

But, as from April 1st, 2017 there is a new 16.5% VAT flat rate for businesses with limited costs.

“Businesses using this scheme, or those thinking of joining it will have to decide whether they are a limited cost trader,” said Peter Way-Rider, Tax Manager at Ellis & Co.

“For those businesses who don’t purchase any goods or make significant purchases it will be obvious, but for those who don’t fit in a clear bracket, a test will have to be taken to work out if the 16.5% rate can be used.”

For further information, or to find out if the Flat Rate Scheme is right for you and your business contact Peter on 01244 343504.