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UK curbs VAT Flat Rate Scheme


UK curbs VAT Flat Rate Scheme

The UK has announced today that it will curb the use of the Flat Rate Scheme (FRS) to limit potential exploitation.

FRS enables very small businesses to only charge a reduced VAT rate (compared to the UK 20% standard rate) on their gross income without having to report input VAT deductions. In effect turning VAT into a simple to administer sales tax. The rate on the tax payer’s output VAT is set by industry:

  • Accountancy and legal services 14.5%
  • Journalism or entertaining 12.5%
  • Computer or IT consultancy 14.5%
  • Business services not listed elsewhere 12%
  • Estate agents and property management 12%
  • Management consultancy 14%

In his annual Autumn Statement, the UK’s Chancellor today announced that the rate for businesses with limited limited input VAT would be raised to 16.5% from 1 April 2017. This will be defined as a business with costs on goods below 2% of their gross turnover.

The measure has been introduced as the government believes many traders have gained significant cash advantages from having limited input VAT charged.  This includes 'splitting' the avoidance technique of dividing one business into a smaller companies to enjoy simplification reliefs like FRS.

 

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VP Global Indirect Tax
Richard Asquith
VP Global Indirect Tax Richard Asquith
Richard Asquith is VP Global Indirect Tax at Avalara, helping businesses understand their compliance obligations as they grow globally. He is part of the European leadership team which this year won International Tax Review's Tax Technology Firm of the Year. Richard qualified as an accountant with KPMG in the UK, and went on to work in Hungary, Russia and France with EY.