The Flat Rate scheme (FRS) allows traders with an annual turnover of less than £150,000, to issue VAT invoices to business customers as normal but only account for VAT at a flat rate percentage of their total turnover. The flat rate percentage used is dependent on what business sector that the trader is in and any VAT incurred on imports and other costs cannot be reclaimed separately.
Due to reports that this scheme was being abused by certain businesses in the UK, the Autumn statement announced that from 1 April 2017 any business using FRS will have to decide if they are a limited cost trader. A limited cost trader is a business that either has:
- A gross purchase amount of goods in a prescribed accounting period that is less than 2% of its gross turnover. (Certain everyday purchases of goods such as stationary is to be excluded from this calculation, as is the purchase of business assets)
- A gross purchase amount of goods that is more than 2% when compared to gross turnover but less than £1,000 a year in total.
If a business finds that it is a limited cost trader then they will be forced to use a new higher flat rate of VAT at 16.5% on their sales irrespective of the type of business sector they are in.