01.03.17 VAT Notice 733: Flat Rate Scheme for small businesses

VAT Notice 773: Flat Rate Scheme (‘FRS’) was updated on 28 February 2017, replacing the November 2016 edition. The update amends the notice to include the changes to the FRS announced at the Autumn Statement: the introduction of a limited cost trader or business.

The notice refers to limited cost trader although the legislation refers to a limited cost business. These terms are synonymous but we will use the term limited cost business throughout here.

The updates are included at paragraphs 4.4, 4.5 and 4.6.

The notice continues to explain the principles and benefits of the FRS but has been to developed to include the following; -

Paragraph 4.4 –  Limited cost businesses

The changes come into effect on 1 April 2017. The rate for limited cost businesses should not be used prior to this date. Please see out previous news article to see when a business is a limited cost business.

If you are a limited cost business, then the flat rate used should be 16.5%. A calculator has been made available to help determine whether a business qualifies as a limited cost business.

To use the calculator, click here.

HMRC have stated that, as we believed, a business can be a limited cost business in one VAT period and not in another, i.e. the test needs to be applied on a VAT-period basis.

It is possible that, if you a limited cost business, it may be more beneficial to stop using the FRS and instead revert to standard VAT accounting so that you can reclaim input VAT.

Paragraph 4.5 –  VAT returns that covers both before and after 1 April 2017

The VAT notice states that, if you have a VAT period that overlaps the starting date, then you must split the return into two periods: one prior to and one following 1 April 2017. The second period should start on this date. A business will have to check if they are a limited cost business in the period after 1 April 2017, and any threshold should be pro-rated accordingly.

There are examples covering this situation at paragraph 4.5.

Paragraph 4.6 –  Relevant goods

This paragraph covers the definition of relevant goods and provides a list of what HMRC consider to be relevant goods and what they consider not to be. The lists are not entirely exhaustive and it should be bared in mind that this is HMRC’s view.

Relevant goods are defined as “goods that are used exclusively for the purposes of your business”.

Examples from the list of relevant goods include; -

• Stationery and other office supplies to be used exclusively for the business
• Gas and electricity used exclusively for the business
• Standard software, provided on a disk

Examples of supplies from the list that don’t qualify as relevant goods include; -

• Accountancy fees – this is a service
• Advertising costs – also a service
• An item which is leased or hired (i.e. a printer) – this also counts as a service as ownership of the item will never be transferred to the business
• Rent – this is deemed a service

VAT Notice 733 can be found here.

Aspire Comment

The Government introduced this measure in order to tackle ‘abuse’ of the FRS. It is clear that Government are going ahead with the FRS changes; they are fast approaching along with the definitive financial impact it will impose. The question still remains – will the administration benefits outweigh the financial difficulties?

We can provide advice on:

• Whether a supply is a relevant good
• Determine whether your business is a limited cost trader
• Assess the impact of the scheme

If you have any questions regarding the FRS changes or the additions made to the VAT notice then please get in contact on 0121 445 6178, Aspire can help.