The Chancellor announced that he will tackle ‘aggressive abuse of the VAT flat rate scheme’ with the introduction of a new 16.5 per cent VAT flat rate for businesses with ‘limited costs’ and who are within the Flat Rate Scheme.
Advertisement This will take effect from April 1 2017. The VAT Flat Rate Scheme (FRS) is a simplified accounting scheme for small businesses and has been in place in its present form since 2004. It enables small traders, including many freelancers, to account for VAT only by reference to their sales and not to have to take into account their purchases.
Currently businesses determine which flat rate percentage to use by reference to their trade sector and these range from four per cent (for some retailers) to 14.5 per cent for labour only sub-contracting businesses and some engineers.
From April 1 2017, there will also be an additional test: FRS businesses will also be required to determine whether they meet the definition of a ‘limited cost trader’, which will be included in new legislation.
If they meet the test, then they will be required to use a new 16.5 per cent Flat Rate. This will be the highest rate within the Flat Rates.
Mystified
Michael Steed, from tje Association of Taxation Technicians (ATT) said: “While we wholeheartedly support action against aggressive abusers, we are mystified as to what mischief this is intended to correct. The FRS is a workaday scheme that allows for some simplification of the VAT rules and has been around for a long time. Taxpayers and their agents select the closest trade sector to the business. This can be difficult given the limited range of flat rates that the VAT Regulations provide.
“The introduction of a definition of what constitutes a ‘limited cost trader’ will inevitably complicate the FRS. How for example will it deal with the situation where a trader’s cost base changes significantly between years?
“We look forward to the consultation in which we hope HMRC will fully justify why after many years it wishes to complicate a very straightforward and practical scheme.”
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Susie Hughes © Shout99 2016
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