Autumn Statement 2016: Tackling aggressive abuse of the VAT Flat Rate Scheme

The Flat Rate Scheme (FRS) is used by small businesses to simplify the way they calculate their VAT liability.

The Government believes there is ‘inappropriate use’ of the FRS and is therefore introducing a new 16.5% VAT flat rate for businesses with limited costs, which incorporates almost no input tax recovery.  This will take effect from 1 April 2017 and will be an obligatory rate for certain businesses.

From 1 April 2017, in addition to determining in which trade sector they belong and identifying the applicable flat rate percentage, FRS businesses will also be required to determine whether they meet the definition of a ‘limited cost trader’.  For each accounting period, they will be required to use the appropriate flat rate percentage.

A ‘limited cost trader’ will be defined as one whose VAT inclusive expenditure on goods is either:

  • less than 2% of their VAT inclusive turnover in a prescribed accounting period, or
  • greater than 2% of their VAT inclusive turnover but less than £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000).

For the purposes of this measure, goods must be used exclusively for the purpose of the business, but exclude certain items.  Anti-forestalling rules also apply to prevent any business defined as a ‘limited cost trader’ from continuing to use a lower flat rate beyond 1 April 2017.

Draft secondary legislation will be published on 5 December 2016 and businesses will have eight weeks to comment.  An online tool will be published to help determine whether a business should use the new rate.

Small businesses and advisers to small businesses who currently use the FRS will be affected and should apply the new rules from 1 April 2017.