New guide unveiled on Flat Rate VAT changes

Contractors potentially affected by April’s changes to the VAT Flat Rate Scheme have been written to by the taxman.

Even freelancers who haven’t been written to, but who may be caught by the new definition of a ‘limited cost’ trader from next month, can now access a 17-part guide on the changes.

Outlining how to gauge whether you’re affected (being a limited cost trader determines your rate rather than the sector your business is in); what to do, from when and how, the guide includes three helpful examples:

Reproduced below, the examples show when a business is caught by the new, typically higher rate of FRS VAT imposed on limited cost traders, and when they are not caught.

Example 1
A business has a flat rate turnover of £10,000 a quarter. It spends £260 on relevant goods.
This is more than 2% of the flat rate turnover and more than £250 so the rate they need to use is the sector rate for their business.

Example 2 
A business has a flat rate turnover of £20,000 a quarter. It spends £325 on relevant goods.
This is more than £250 but less than 2% of the flat rate turnover so the rate they need to use is 16.5%.

Example 3
A business has a flat rate turnover of £10,000 a quarter. It spends £225 on relevant goods.
This is more than 2% of the flat rate turnover but less than £250 so the rate they need to use is 16.5%.

In an email to potentially affected businesses, HMRC reflected: “Using the new rate may mean that you pay more VAT than you do now.

“You may wish to reconsider whether you still want to use the Flat Rate Scheme. If you’re trading below the VAT registration threshold, you may decide to deregister.”