If your company has reached the VAT threshold, then you are required by law to register for VAT. If this is the case, then you are also required to prepare and submit the quarterly VAT return. We Helps clients in VAT registration, preparation of VAT returns. Clients who are not VAT registered, we will notify them when they are legally obliged to register for the VAT and when to submit it.

When we compile the data for the VAT returns we not only do the bookkeeping and prepare the return, but we also ensure that information that have been given to us is accurate. We pay particular attention to ensuring that we are claiming for all VAT your business has incurred, ensuring you pay as little VAT as possible to HMRC.

Flat Rate

If your business is a not limited cost trader then you can take advantage of registering your company under flat rate scheme. We advice clients to register under flat rate scheme only if we see there is a potential benefit to them. This limited cost trader defination is designed by HMRC especially for the contractors who were using flat rate scheme and saving money.

From 1st April 2017, so-called ‘limited cost traders’ will use a new 16.5% rate when calculating their FRS liabilities. All other businesses will continue to use the current percentages used by HMRC. So, limited company contractors who meet the definition of limited cost traders will be liable to pay hundreds, if not thousands of pounds in additional VAT liabilities each year.

What is a "limited cost trader"?

According to the HMRC technical note (and confirmed in VAT Notice 733), this is defined as a business which has a VAT-inclusive expenditure on relevant goods of 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).

To prevent businesses incorporating everyday purchases to increase their costs above the 2% threshold, the following items must be excluded when working out whether or not your business is deemed to be a "limited cost" one:

  • 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)

Unfortunately, HMRC have also decided to dis-allow a number of services from its definition of what ‘relevant goods’ are – and, as a result, many contractor companies will fit the description of a ‘limited company trader’ despite purchasing significant services, including:

  • Contractor accountancy fees.
  • Advertising costs.
  • Any type of electronically downloaded service (such as a subscription to a professional magazine).
  • Any downloaded software, or bespoke software.
  • Office rental costs.

You can work out if you are likely to be a ‘limited cost trader’ by using this HMRC Flat Rate VAT calculator.

How much will this VAT change cost me?

Clearly, the tax advantage afforded to many who have used the FRS will no longer be available if you are indeed a ‘limited cost trader’ – this is the whole point of the legislation.

  • For example, if your company had a turnover of £100,000 in the 2016/17 tax year, your VAT-inclusive turnover would be £120,000 (£100,000 + 20%). You would have to repay £17,400 to HMRC – meaning you made a net gain during the year of £2,600!
  • Under the new rules, using the same turnover, from 1st April 2017 you need to repay £19,800 to HMRC – leaving you with a net gain of a mere £200 compared to a business on the standard VAT scheme.
Should I leave the Flat Rate VAT scheme?

There are a number of things to consider here if your business is affected by this new rule:

  • You can decide whether your company operates either the FRS or standard VAT scheme. It is up to you. There is no additional cost associated with either (aside from the tax differential).
  • The FRS was designed to make calculating VAT easier, so you might decide to remain for this reason alone, especially if you incur very few business expenses.
  • During your first year after registering for VAT, your company will still qualify for a 1% deduction in the flat 16.5% rate, so it is still advantageous for new companies to join the scheme – even just for the first year.
  • Your accountant will be able to let you know which scheme is most suitable for your business from April 2017 onwards, based on your own accounts.
Further Information

To prevent businesses invoicing in advance or taking other measures to avoid meeting the Government’s definition of a limited cost trader, anti-forestalling legislation was also published on 23rd November.

The Government published an extensive guide to the new Flat Rate VAT rules at the end of February 2017.

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