The Government has introduced a major change for businesses that incur low costs on goods and currently apply the Flat Rate Scheme (FRS) for VAT. This will apply from 1 April 2017.
The business will need to assess whether it is classified as a “limited cost business”. If it is, then the relevant flat rate percentage will be 16.5%, which is higher than the previous sector flat rates.
You will be a limited cost business if the amount you spend on “relevant goods” including VAT is either:
a) Less than 2% of your VAT inclusive turnover; or
b) Greater than 2% of your VAT inclusive turnover but less than £1,000 per year (apportioned to the VAT period i.e. £250 per quarter)
HMRC have specifically identified the following as “NOT” being relevant goods:
– Vehicle costs including fuel (unless operating in transport sector)
– Food or drink for you or your staff
– Capital expenditure goods
– Goods for resale, leasing, letting or hiring out (if not your main business activity)
– Goods you intend to re-sell or hire out (if not your main business activity)
– Any services:
o Accountancy fees
o Advertising costs
o Items leased/hired to your business
o Laptop or mobile phone use
o Anything provided electronically e.g. downloaded magazine
o Rent
o Software you download
o Bespoke software
If your business purchases goods with a value that is close to the limits in (a) or (b) above, then an assessment will need to be made each time a VAT return is completed, and either the sector or limited cost percentage is applied.
VAT return periods covering both before and after 1 April 2017 will require additional work to split the transactions into the appropriate period.
Contact us for further enquiries and we’ll be happy to help.