From 1st April 2017, the VAT bills of many Flat Rate Scheme (FRS) users will increase dramatically, because of the introduction of a new ‘limited cost trader’ category.
This means that if your expenditure on “relevant goods” is less than the higher of 2% of gross (VAT inclusive) turnover or £250, you will need to use the new 16.5% flat rate percentage. At that percentage a trader would only retain 0.2% of net turnover, as opposed to 3.2% on a flat rate percentage of 14%.
HMRC state that “relevant goods” are goods used by an FRS trader exclusively for business purposes but, importantly, excluding the following: vehicles, vehicle parts and fuel; any food or beverages for consumption by the flat-rate trader or their employees; and capital expenditure goods.
Two possible strategies to deal with this might be to leave the Flat Rate Scheme or, if your turnover is below the threshold, deregister from VAT altogether. If you think this might affect you, please contact my colleague Shane White to discuss the best course of action (01223 843324 or email@example.com ).
Written by Simon White
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