In Tax changes and impacts on

The advantages of Flat Rate Scheme have been restricted from 1st April 2017 as if you are classed as a ‘’limited cost business’ you will have to pay a higher rate of 16.5%.

You’re classed as a ‘limited cost business’ if your goods cost less than either:

– 2% of your turnover

– £1,000 a year (if your costs are more than 2%)

Goods are moveable items or materials exclusively used in your business. You can also include gas and electricity. If you’re estimating, give realistic figures.

These don’t include:

  • any services – which is anything that isn’t goods
  • expenses like travel and accommodation
  • food and drink eaten by yourself or your staff
  • vehicle costs including fuel unless you’re in the transport business using your own, or a leased vehicle
  • rent, internet, phone bills and accountancy fees
  • gifts, promotional items and donations
  • goods you will resell or hire out unless this is your main business activity
  • training and memberships
  • capital items for example office equipment, laptops, mobile phones and tablets

If you are classed as a Limited Cost Business you will have to pay a rate 16.5%. This means that your company will no longer make any significant income (FRS Gain) from being on a flat rate scheme. Also being on a flat rate scheme does not usually allow you to claim the input VAT on your expenses.

We recommend that you assess your annual expenditure to estimate the input VAT you could claim back by not being on a Flat Rate Scheme. If you believe this is a significant amount then the best option would be to leave the FRS and account for VAT as normal i.e. Output less Input.

This will require you to split your expenses so that the Net amount is charged to the P&L and the input VAT amount is recorded separately.  Similarly the net turnover will have to be recorded separately from the output VAT. At the end of each quarter VAT payable will Output VAT less Input VAT. This does means detailed and timely bookkeeping.

Also note that under this option, as mentioned, the expense being recorded on the P&L will be the net amount as opposed to a gross expense being recorded on the P&L under the FRS scheme.

With the ‘making Tax Digital’ initiative likely to go live from next year for small businesses you will also be required to use a book keeping software in order to make the quarterly submissions. You could be better off adapting the book keeping change now and maybe save some VAT, as from next year onwards the habit of using excel sheets will have to change anyways.

We can help you with your book keeping using a software. The increase in work to ensure that quarterly submissions are made to HMRC will increase the costs. It is early days and the guidance from HMRC is light – we are expecting an increase in costs of up to £350 from next year due higher software charges and accountancy fee.


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