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New VAT Flat Rate Scheme changes

The anti-avoidance measures for the VAT Flat Rate Scheme of 16.5% come into force from 1 April for businesses with limited costs. The change was announced in the Autumn statement to tackle ‘aggressive abuse’ and the HMRC estimates that it will affect 123,000 out of 411,000 scheme users.

From April, FRS businesses will need to decide whether they are a limited cost trader, 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 £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000)

Goods must be used exclusively for the purpose of the business but exclude the following items in order to prevent attempts to inflate costs above 2%:

  • Capital expenditure
  • Food or drink for consumption by the business or its employees
  • Vehicles, vehicle parts and fuel (except transport businesses)

Please contact us if you would like further advice regarding the changes outlined above.

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