New VAT Flat Rate Scheme rate for certain businesses

Emily Coltman

Chief Accountant

It's a new financial year and there have been changes to the VAT Flat Rate Scheme, the alternative way for small businesses to work out how much VAT to pay HMRC each quarter. If you currently use the Flat Rate Scheme, or are thinking about switching to it, these changes could impact you. Here’s the lowdown on the recent adjustments.

What is the VAT Flat Rate Scheme?

The VAT Flat Rate Scheme (FRS) is an alternative way for small businesses to work out how much VAT to pay to HMRC each quarter. When you are using the Flat Rate Scheme, you still charge VAT to your customers in the usual way, but you also pay a percentage of your total sales to HMRC as VAT.

This percentage depends on what your business's trade is. If you’re in the first year that your business is registered for VAT (which is not necessarily the same as the first year you’re on the VAT Flat Rate Scheme), you also get a 1% discount on the percentages – so you would use, for example, 9% instead of 10% for advertising.

The advantages of using the VAT Flat Rate Scheme can include simpler record-keeping (because you don’t have to figure out what VAT you can claim on your purchases) and it can also save you money(although this depends on what sector you’re in and how much VAT you pay on your costs). Check out if your business could be better off with out VAT Flat Rate Scheme calculator.

New rate starting 2017: ‘limited cost trader’

From 1 April 2017 businesses with a low cost base (who don’t buy many goods) will now be known as ‘limited cost traders’. A limited cost trader is defined as one that spends less than 2% of its sales on goods (not services) in an accounting period. A business would also be a limited cost trader if it spends less than £1000 a year on certain goods; businesses such as accountants and IT consultants, buying very few goods and selling predominantly their own labour, are likely to be limited cost traders.

Many small businesses rely on the FRS to simplify the management of their taxes, and will now have to spend time every quarter working out whether they count as limited cost traders or not.

Limited cost traders can still use the VAT Flat Rate Scheme but their percentage will be 16.5% (which is currently higher than any other rate).

Why has the scheme changed?

This change has been designed to stop people taking advantage of the VAT Flat Rate Scheme by registering for VAT before they have to and saving money, but it will adversely affect many small limited cost traders.

What to do if you want to start using the VAT Flat Rate Scheme

Take a look at this handy guide if you’re wondering if you’d be better off on the VAT Flat Rate Scheme. If you use FreeAgent and set your FreeAgent account to flat rate VAT, it will calculate all the numbers for you.

What to do if you’re currently using the VAT Flat Rate Scheme

If you’re a limited cost trader and using the VAT Flat Rate Scheme, your percentage will be 16.5%. Use our VAT FRS calculator to determine if you would continue to benefit from using the Flat Rate Scheme.

There are several ways to make changes to your VAT Flat Rate Scheme status in FreeAgent:

  • If you want the change to your Flat Rate Scheme status or percentage to take effect from a VAT quarter start date, please follow the instructions outlined in our article on checking, editing and locking a VAT return.
  • If you want the change to your Flat Rate Scheme status or percentage to take effect from a date that falls mid-way through a VAT quarter, you will need to complete the following steps to file your VAT return for that quarter.

Disclaimer: The content included in this blog post is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this blog post. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.

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