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VAT Flat Rate Restricted


The VAT flat rate scheme (FRS) allows small businesses to simplify their VAT records and, in many cases, keep a slice of the VAT
they collect on behalf of the Government. Unfortunately, there has been abuse of the FRS, so HMRC is changing the rules.
From 1 April 2017, it will be more difficult to make money out of the FRS. A VAT registered business which spends less than 2% of its gross turnover, or less than £1,000 per year on goods, will have to use an FRS percentage of 16.5%. The 'goods' counted for this test don’t include food and drink for the employees, motor expenses, or capital items.The high percentage of 16.5% means the business 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 the FRS after 1 April 2017, although the simplification for VAT records remains. If your business supplies services (anything from hairdressing to consultancy services) and you use the FRS, we should
talk about whether you should remain within the FRS and, in some cases, whether you should even remain VAT-registered.