The VAT flat rate scheme (FRS) allows small businesses to simplify their VAT records and, in many cases, keep a portion of the VAT they collect on behalf of the Government.
HMRC are changing the rules because of abuse of the VAT flat rate scheme. From 1 April 2017, it will be more difficult to make any money out of FRS.
A VAT registered business which spends less than 2% of its gross turnover, or less that £1,000 per year on goods, will have to use an FRS percentage of 16.5%. The goods counted for this test do not include food and drink for employees, motor expenses or capital items.
The high percentage of 16.5% means the businesses will have to pay over almost all of the VAT it collects, with no deductions permitted for VAT incurred on purchases. Businesses which operate in the knowledge and service sectors are unlikely to benefit financially from using FRS after 1 April 2017, although the simplification for VAT records remains.
If your business supplies services and you use FRS, you should discuss with your accountant about whether you should remain within the FRS and, in some cases, whether you should even remain VAT registered.