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Flat Rate VAT - what do I need to do from 1st April 2017?

Flat Rate VAT - what do I need to do from 1st April 2017?
Friday, March 24, 2017

The Flat Rate VAT scheme is changing from 1st April 2017, and many businesses who operate the Flat Rate Scheme (FRS) have now received letters telling them that they may need to change their percentage rate.


What is Flat Rate?

The amount of VAT a business pays or claims back from HMRC is usually the difference between the VAT charged by the business to customers and the VAT the business pays on their own purchases. With the Flat Rate Scheme:
  • you pay a fixed rate of VAT to HMRC; the rate depends on what industry you are in
  • you keep the difference between what you charge your customers and pay to HMRC
  • you can’t reclaim the VAT on your purchases - except for certain capital assets over £2,000
  • To join the scheme your VAT turnover must be £150,000 or less (excluding VAT), and you must apply to HMRC.
What is changing on 1st April 2017? HMRC have introduced new legislation about "limited cost businesses" and a new rate of 16.5% for these businesses in the FRS. As an example, if a limited cost business sells a product for £100 plus VAT (£120 in total) it will pay over to HMRC £19.80 (£120 x 16.5%). Under the usual VAT rules the same business would pay over £20 - but be able to reclaim VAT on it's purchases. It's very likely that most limited cost businesses will prefer to come out of the FRS and be able to reclaim the VAT on their expenditure since the Flat Rate saving is so minimal (just 20p in this example) at this percentage.

Do I run a Limited Cost Business?

You will be classed as a Limited Cost Business if your goods cost less than 2% of your turnover OR you spend less than £1000 a year on goods. In this instance Goods are classed very specifically as moveable items or materials used exclusively in your business, and excluding the following:
  • 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
You can also use the HMRC tool to check your Flat Rate percentage here:
Check your Flat Rate

In general if you run a contractor type business where you mostly sell services to other businesses and don't buy in items for resale, you're going to come under the Limited Cost Business legislation.
I'm a Limited Cost Business - what happens next?
You have a couple of options; to apply the 16.5% rate from 1st April, or to come out of FRS all together. You can do this by writing to HMRC, and then calculating VAT under the usual rules from 1st April 2017. If your VAT quarters span this date, you may need to prepare your return using two different methods.
Alternatively, it may be worth considering de-registering for VAT if your turnover is below the threshold. If you're unsure what is best for your business, drop us an email and we can help you to weigh up the options. There's more guidance from HMRC here: HMRC Flat Rate VAT guidance




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We found Panthera via our search for a Xero expert. We knew the software we wanted to use, and needed a forward-thinking accountancy partner who could get us up and running, and teach us the ropes moving forward. Tory and her team have always been on hand to answer our questions, and help us to grow as a business, particularly during periods of big change, such as becoming VAT registered. They are always on hand to alleviate any concerns and help to keep our records in order, which makes our year-end accounts an absolute breeze! Being based in Bristol, our relationship is entirely email based, alongside one consolidation meeting at year end - this keeps things simple, efficient and most importantly, hassle-free.

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The whole team at Panthera are great! Working with them has been a huge support to my growing business. They help me to understand the numbers I need to know. They give me technology solutions like Xero so that I can process things quickly and have access to my own figures. They are quick to reply, highly knowledgeable, nothing is too much trouble and as well as making sure that everything is compliant and on time, they are enthusiastic, professional and fun to work with.

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I would like to say that Panthera Accounting have helped me with my business accounts for more than 4 years now. They have consistently offered an excellent competitively priced service that works both professionally and in such a friendly way that I would highly recommend them to everyone considering using their services.

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I had been with Mr Dunn for 20 years when upon his death Panthera took over the business. They now play a bigger part in the running of my business, they do all the stuff that has to be done but I don't like doing ie book keeping, VAT, wages, and returns. They are always there to answer queries and sort out issues and make sure all Tax deadlines are met. Their costs are fair, service is great and I have and would highly recommend them.

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Panthera Accounting have gone above and beyond the call of duty to guide and support our Company. They offer a professional, friendly and personal service that can take the stressful and sometimes frightening feelings out of running a business. They have guided us through the working of Xero and have offered “teaching sessions” on the day to day running of the accountancy package. Our only regret is that we didn’t join their team earlier.

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