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Explaining VAT flat rate changes

12th April 2017

Explaining VAT flat rate changes

The government has made changes to the way VAT is applied to certain businesses. If your business has been on the Flat Rate Scheme (FRS), you may need to talk to your accountant or VAT expert to make sure you are compliant with these changes. The previous FRS allowed businesses to minimise their VAT record-keeping, making the process more user-friendly and cost-effective. It was particularly beneficial to smaller businesses, who could pay VAT at a lower rate if they fell under the threshold of £150,000 turnover. This rate varied according to the type of business, but was not higher than 14.5%.

The government says it is concerned that the FRS was being abused, and so it has introduced a new flat rate percentage of 16.5% for some scheme users. This rate applies to businesses which are classified as ‘limited cost traders’. This is defined as businesses which spend less than 2% of their turnover on goods per quarter, with a minimum spend of £250.

The consequence of this change is that these businesses are paying almost as much VAT as they collect, rather than benefitting from the gap between VAT collected and paid that existed under the previous scheme. For some businesses, this means it is a good idea to re-visit your VAT accounting to see if you should come off the FRS and move to the standard VAT scheme, or whether you are under the registration threshold and should de-register.

This change could have a significant effect on your business and, as the new rate already applies, you will need to address the issue soon and make the decision that is best for your business. There is a process that you should follow in order to change the way VAT is assessed and paid for by your business and you should always take professional advice to make sure you are complying with HMRC requirements.

To find out more about this change and how it affects your business, please contact us on 01252 711244.

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