How the new Flat Rate VAT changes 2017 will affect you!
Here are two main reasons why business owners need to be aware of the significant Flat Rate VAT changes for 2017:
- You may need to pay HMRC more VAT
- You could end up with a hefty VAT bill at a later date
This is why it’s important for anyone who owns a business to FULLY understand the complex Flat Rate Scheme (FRS) changes which came into effect from 1st April 2017.
The Flat Rate Scheme explained
The FRS was designed to simplify the recording of sales and purchases for small businesses and sole traders.
The VAT flat rate percentage which applies to you depends on the type of business you run.
The FRS let you calculate the total amount of VAT due by applying a fixed flat-rate percentage to gross turnover.
But, unlike standard VAT turnover, flat rate turnover takes into account business income (from sales) and the VAT paid on that income.
Since the changes were implemented on 1st April 2017, all businesses wanting to use the scheme must now work out if they qualify as a ‘limited costs’ business.
To meet FRS requirements, the amount spent on relevant goods (including VAT) must be:
- Less than 2% of VAT flat rate turnover in a prescribed accounting period
- More than 2% of VAT flat rate turnover – but less than £1,000 a year.
Who will the Flat Rate VAT changes 2017 affect?
There’s no getting away from the fact that firms who provide services, and labour-intensive businesses which spend little on goods, will pay more VAT.
Most consultants, IT contractors and construction workers – who supply their labour but do not buy the raw materials they use – will be affected.
Businesses which use the FRS, or are thinking of joining the scheme, must now think carefully about whether they are a ‘limited cost’ trader.
For businesses who purchase no goods, or those who make significant purchases, this will be obvious. Others must use their accounting information to complete a simple test and work out whether they should use the new 16.5% rate.
Businesses using the FRS will be expected to ensure that they use the appropriate flat rate percentage for each accounting period.
What should I do next?
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