A number of businesses use the VAT Flat Rate Scheme (‘FRS’) because it is designed to simplify record keeping and make it easier to work out the VAT due. The Autumn Statement is proposing changes however which might have an impact on those businesses that provide services, spending very little on raw materials.
Normally a business will pay over to HMRC VAT on outputs (sales) after deducting VAT on inputs (purchases). The FRS reduces this to one step by setting a fixed rate on all sales – the HMRC website has a list of percentage rates for differing types of business. The Government is concerned however that some businesses, termed ‘limited cost traders’, who use FRS, are paying less VAT than is appropriate.
A limited cost trader is one which typically spends less than 2% of its sales on raw materials, so while FRS is an approximation this can mean some businesses pay more VAT than others.
In simple terms, from 01 April 2017, the rate for limited cost traders will increase to 16.5% which is likely to have an impact on service-based businesses like hairdressers, accountants, providers of labour, IT contractors, and more… This is likely to mean that small businesses will pay more VAT to remain within the scheme.
If you feel the changes might have an effect on your business please feel free to contact us for a no-obligation consultation.