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VAT – leaving the Flat Rate Scheme

The VAT Flat Rate Scheme (FRS) does simplify the calculation of VAT returns, but there are certain circumstances when you may no longer use the FRS.

You will need to leave if your turnover on the anniversary of joining was more than £230,000 including VAT in the last twelve months or if you expect your total income in the next thirty days to be more than £230,000 (including VAT).

You may also decide that you should leave the FRS if you are classified as a “limited cost trader”. This is defined by HMRC as:

You are classed as a ‘limited cost business’ if your goods cost less than either:

  • 2% of your turnover
  • £1,000 a year (if your costs are more than 2%)

This means you pay a higher rate of 16.5%.

If you are obliged to use a rate of 16.5% - if your circumstances reveal that you are a limited cost trader – there is no real benefit in using the FRS apart from the simplicity of the reporting.

Traders who use the FRS can make a cash profit if the rate they use – based on their business classification – is one of the lower rates. The FRS rates currently range from 4% to 16.5%. The profit arises because the amount that they are required to pay under the FRS is less than the VAT added to their sales less any VAT included in purchases of goods or services.

If you do benefit in this way you may be reluctant to leave the FRS. Unfortunately, ignoring the turnover exit limits or the limited cost trader regulations is not to be recommended. HMRC are empowered to enforce these rules and charge penalties for non-compliance.

We recommend a periodic review of the VAT scheme that you use to ensure that you are still meeting the requirements to stay in the scheme. It is also advisable to check out any other schemes that you might qualify to join and see what benefits they might offer.

Please call if you would like to discuss your options.

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