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Flat Rate VAT Scheme Changes

Flat Rate VAT Scheme Changes

Flat Rate VAT Scheme Update

“Tackling aggressive abuse”

VAT – Flat Rate Scheme changes and updates

From April 1st , the VAT Flat Rate Scheme (FRS) will see its first large change in many years where a business will now have to decide whether they meet the definition of a limited cost trader being a large part of the new legislation.

Limited cost trader – VAT FRS 16.5% new rate

There will now be a test to complete for companies who are not sure where they lie on this subject to determine if they should be using the new FRS rate 16.5%. Some companies are simple and can be identified immediately i.e. a company who purchases no goods or a company that makes a significant purchase of goods.

As per HMRC guidelines:

“What is a limited cost trader?

A limited cost trader will be defined as one whose VAT inclusive expenditure on goods is either:

  • less than 2% of their VAT inclusive turnover in a prescribed accounting period
  • greater than 2% of their VAT inclusive turnover but less than £1000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000)

Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:
capital expenditure

  • food or drink for consumption by the flat rate business or its employees
  • vehicles, vehicle parts and fuel (except where the business is one that carries out transport services – for example a taxi business – and uses its own or a leased vehicle to carry out those services)

These exclusions are part of the test to prevent traders buying either low value everyday items or one off purchases in order to inflate their costs beyond 2%.”

Who will this effect?

Essentially anyone who falls in the above criteria, main areas affected will be people like:

  • Accountants
  • Consultants
  • IT Contractors
  • “Labour only” Subcontractors
  • Hairdressers

You can use the HMRC checker to determine your status for the scheme:
Limited cost trader

If you are not classed as a Limited cost trader please see the rates below to establish your FRS %

Flat Rates for types of businesses

Type of businessCurrent VAT flat rate (%)
Accountancy or book-keeping14.5
Agricultural services11
Any other activity not listed elsewhere12
Architect, civil and structural engineer or surveyor14.5
Boarding or care of animals12
Business services not listed elsewhere12
Catering services including restaurants and takeaways12.5
Computer and IT consultancy or data processing14.5
Computer repair services10.5
Entertainment or journalism12.5
Estate agency or property management services12
Farming or agriculture not listed elsewhere6.5
Film, radio, television or video production13
Financial services13.5
Forestry or fishing10.5
General building or construction services*9.5
Hairdressing or other beauty treatment services13
Hiring or renting goods9.5
Hotel or accommodation10.5
Investigation or security12
Labour-only building or construction services*14.5
Laundry or dry-cleaning services12
Lawyer or legal services14.5
Library, archive, museum or other cultural activity9.5
Management consultancy14
Manufacturing fabricated metal products10.5
Manufacturing food9
Manufacturing not listed elsewhere9.5
Manufacturing yarn, textiles or clothing9
Membership organisation8
Mining or quarrying10
Post offices5
Real estate activity not listed elsewhere14
Repairing personal or household goods10
Repairing vehicles8.5
Retailing food, confectionery, tobacco, newspapers or children’s clothing4
Retailing pharmaceuticals, medical goods, cosmetics or toiletries8
Retailing not listed elsewhere7.5
Retailing vehicles or fuel6.5
Secretarial services13
Social work11
Sport or recreation8.5
Transport or storage, including couriers, freight, removals and taxis10
Travel agency10.5
Veterinary medicine11
Wholesaling agricultural products8
Wholesaling food7.5
Wholesaling not listed elsewhere8.5

*than 10% of the turnover for those services. If more than this amount, the business is classed as ‘General building or construction services’.‘Labour-only building or construction services’ means building services where the value of the materials supplied is less