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The New Limited Cost Trader Category For Flat Rate Scheme

The Autumn Statement produced a shocking announcement that a new flat rate scheme (FRS) category will be introduced on 1st April 2017 for a business that does not spend more than 2% of its gross sales (or £250 in a quarter if greater) on buying goods. The category of a limited cost trader will have a rating of 16.5% and will mean a higher VAT for all users caught by the new category. This is because the highest existing rate is 14.% although many schemer users currently operate a flat rate percentage of 12% or 14%. As a specific example, a business of gross sales of £200,000 including VAT will see its annual VAT bill increase by £9,000 if its rate increases from 12% to 16.5%

The FRS has been an important part of the VAT system since April 2002 and has saved thousands of pounds of tax for many SMEs compared to normal VAT accounting. It has also simplified accounting systems and therefore saved time and money for users, and reduced the risk of VAT errors being made. But that outcome will change on 1st April because an estimated 123,000 out of 411,000 existing scheme users will be classed as limited cost traders. The aim of the new rate is to supposedly tackle aggressive abuse of the scheme by labour only agency workers but it will affect all users who have low spending on goods i.e including the honest traders

Impact Of The Proposed Changes

HMRC issued a policy paper on 23rd November 2016 titled ''VAT: tackling aggressive abuse of the Flat Rate Scheme''. The paper recognises that ''the new 16.5% rate will remove the cash advantage for those businesses with limited costs'', i.e. all businesses are affected and not just the supposed tax avoiders. It also revealed some interesting statistics:

  • The new limited cost trader category will increase the annual tax yield by £130 million.

  • Two thirds of FRS users are registered for VAT on a voluntary basis (annual taxable sales are less than £83.000) and HMRC anticipate that the new category will mean that '' many of them may decide to deregister''

  • The limited credit for input tax that is evident with the 16.5% rate means that an estimated 4,000 FRS users will revert to normal VAT accounting, i.e. output tax less input tax.

  • HMRC quotes an average figure of £390 in cost savings for a business that chooses to deregister after 1st April 2017

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