HMRC have helpfully updated their guidance on the new Flat Rate VAT regime a month before the changes take effect. Find listed the most important changes and information on the ”Limited Cost Trader rules” for small businesses.
HMRC have helpfully updated their guidance on the new Flat Rate VAT regime – a month before the changes take effect. To recap, Chancellor Philip Hammond announced the change to the FRS in his Autumn Statement in an attempt to “shut down inappropriate use of the VAT flat rate scheme”. You can read more detail in our recent post.
VAT Notice 733: Flat Rate Scheme for Small Businesses was revised on February 28th. The relevant details are contained in sections 4.4 to 4.6.
We have read through the document and the most significant items are:
- HMRC have updated their online calculator which helps to work out the flat rate that you should use
- For some businesses this will be clear, other businesses – particularly those whose goods are close to 2% – may need to complete this test each time they complete their VAT return. This is because you can move from a limited cost rate of 16.5% in one period to your relevant sector rate in another. This would happen if your costs fluctuate above and below 2%
- There is more detailed guidance on the definition of ‘relevant goods’. To recap, if you use the Flat Rate Scheme then you are classed as a Limited Cost Trader if your expenditure on ‘relevant goods’ is 2% or above.
As the list below shows, there is very little expenditure which qualifies as relevant goods, and a long list of expenditures which don’t qualify.
of relevant goods
This isn’t an exhaustive list:
- stationery and other office supplies to be used exclusively for the business
- gas and electricity used exclusively for your business
- fuel for a taxi owned by a taxi firm
- stock for a shop
- cleaning products to be used exclusively for the business
- hair products to use to provide hairdressing services
- standard software, provided on a disk
of supplies that aren’t relevant goods
This isn’t an exhaustive list:
- accountancy fees, these are services
- advertising costs, these are services
- an item leased/hired to your business, this counts as services, as ownership will never transfer to your business
- food and drink for you or your staff, these are excluded goods
- fuel for a car this is excluded unless operating in the transport sector using your own, or a leased vehicle
- laptop or mobile phone for use by the business, this is excluded as it is capital expenditure see paragraph 15.1
- anything provided electronically, for example a downloaded magazine, these are services
- rent, this is a service
- software you download, this is a service
- software designed specifically for you (bespoke software), this is a service even if it is not supplied electronically
In summary, there is a high chance that any contractor or professional service firm using the Flat Rate Scheme will fall foul of the Limited Cost Trader rules. In many cases it may make financial sense to stop using the FRS altogether and revert to the standard method of accounting for VAT.
Please don’t hesitate to get in touch if you require more help on the changes.