Further updates to VAT Flat Rate Scheme.
Last month, we highlighted the changes in the VAT flat rate scheme for those businesses deemed to be ‘low cost traders’. HMRC have now issued final guidance on the changes to the scheme. The rules have been expanded, but effectively remain the same as the draft guidance that we previously commented on. However, it has been clarified that the test can be undertaken on a quarterly basis. If your business incurs input tax of more than £250 in a quarter on ‘relevant goods’, and that input tax represents more than 2% of your gross turnover, then the business will be able to use the flat rate percentage applicable for its industry sector rather than the 16.5% prescribed for low cost traders.
For some businesses, the result could be that the flat rate percentage used will vary from quarter to quarter. Whatever rate is used, it is key that businesses record their methodology and keep appropriate records to justify their application of the flat rate, particularly in their assessment of ‘relevant goods’.
Businesses may pay more VAT under the new 16.5% flat rate than if they accounted for VAT under the standard method and may wish to consider leaving the flat rate scheme. Meston Reid & Co recommends that all businesses on the flat rate scheme review their position ahead of 1 April 2017 and take appropriate action to ensure VAT is accounted for efficiently whilst complying with the regulations.
The full guidance can be found here:
View our initial article on this subject here along with a working example: