A business has to consider the level of taxable supplies it has made in the last 12 months at the end of each month, and must register for VAT if it has exceeded the registration threshold. It must also register at any time if it has reason to believe that the threshold will be exceeded in the next 30 days on their own. The threshold rises from £83,000 to £85,000 on 1 April 2017.
A business may deregister if it can satisfy HMRC that taxable supplies in the next 12 months will not exceed a lower ‘deregistration threshold’. This also rises from £81,000 to £83,000 on 1 April 2017.
Flat Rate Scheme
Small businesses with turnover up to £150,000 can register for the VAT Flat Rate Scheme (FRS). This is a simplification: they claim no input tax on their expenses, but keep some of the output tax they charge to customers in order to compensate for this. The amount they keep depends on the type of business.
HMRC has identified ‘aggressive abuse’ of the scheme by employment intermediaries setting up multiple small companies, and has decided this has to be closed down. Unfortunately, this will also negate the benefit of the scheme for many genuine businesses.
From 1 April 2017, a new flat rate of 16.5% applies to ‘limited cost traders’. These are businesses that spend less than 2% of their turnover, or less than £1,000 per year, on goods (excluding capital goods, food for own or employees’ consumption, and vehicles and fuel unless a transport business).
As the output tax collected from customers cannot exceed 16.67% of gross taxable receipts, the benefit of the FRS for a limited cost trader – accounting for 16.5% rather than claiming input tax – will be very small at best, and most such traders will find the benefit has become a cost. HMRC has promised to write to every FRS-registered trader to outline the changes. It is essential for all those businesses to understand the impact of these changes – those who fall within the definition of a limited cost trader will almost certainly be better off returning to the normal VAT system with effect from 1 April.