The Association of Taxation Technicians (ATT) is concerned that VAT changes announced in yesterday’s Autumn Statement will introduce complexity and increases in VAT liability for small businesses.
The VAT Flat Rate Scheme (FRS) is a simplified accounting scheme for small businesses1. In the Autumn Statement, the Chancellor announced that he will tackle ‘aggressive abuse’ of the scheme with the introduction of a new 16.5 per cent VAT flat rate for businesses with ‘limited costs’ and who are within the FRS.
This will take effect from 1 April 2017 and is in response to aggressive tax promoters who offer agency workers an alternative “mini employment company” based overseas which then takes advantage of opportunities such as the FRS.
Michael Steed, Co-chairman of ATT’s Technical Steering Group, said:
“Whilst we wholeheartedly support action against aggressive abusers, we are concerned that in targeting such abuse, many current legitimate users of the FRS will be pulled into the changes and may suffer higher tax burdens as a result.
“The introduction of a definition of what constitutes a ‘limited cost trader’ will inevitably complicate the FRS. How, for example, will it deal with the situation where a trader’s cost base changes significantly between years?
“We look forward to the consultation in which we can raise these concerns with HMRC. The FRS so far has been a very straightforward and practical scheme. It would be a great shame if the many legitimate FRS users have to suffer for the sins of the few who have abused the scheme.”
Notes for editors
- The VAT Flat Rate Scheme (FRS) is a simplified accounting scheme for small businesses and has been in place in its present form since 2004. It enables small traders to account for VAT only by reference to their sales and not to have to take into account their purchases.
Currently businesses determine which flat rate percentage to use by reference to their trade sector (Regulation 55K, VAT Regulations 1995) and these range from 4 per cent (for some retailers) to 14.5 per cent for labour only sub-contracting businesses and some engineers. This can be difficult given the limited range of flat rates that the VAT Regulations provide.
From 1 April 2017, there will also be an additional test: FRS businesses will also be required to determine whether they meet the definition of a ‘limited cost trader’, which will be included in new legislation. If they meet the test, then they will be required to use a new 16.5% Flat Rate. This will be the highest rate within the FRS.