Indirect taxes

VAT flat rate scheme

New measures are being introduced to limit VAT lost under the Flat Rate Scheme (FRS).

The FRS is intended to provide a simplified accounting scheme for small businesses. Under the scheme, the business chooses the appropriate flat-rate percentage, which is applied to the VAT-inclusive turnover. VAT only needs to be accounted for on this basis and not by reference to the VAT charged on individual sales invoices. However, entitlement to input VAT recovery is restricted under the scheme.

From 1 April 2017, a higher flat-rate percentage will apply for ‘limited cost traders’ at 16.5%. FRS users must consider whether they fall within the definition of a limited cost trader, which will be determined by the level of expenditure incurred on goods for the purpose of the business. Anti-forestalling provisions have also been introduced with immediate effect.

FRS businesses will need to ensure that the correct flat rate percentage is applied and confirm whether they fall within the definition of a limited cost trader. The changes are aimed at the service only businesses who have been benefiting from an effective lower VAT liability. Any business which becomes subject to the higher percentage rate may review whether or not it is beneficial to remain in the scheme. 


Other VAT measures

The Government is proposing a raft of other measures to combat VAT avoidance.

A new fulfilment house due diligence scheme is being introduced in 2018, which will require fulfilment businesses to carry out due diligence on overseas businesses selling goods via online marketplaces. This scheme is being introduced to combat VAT avoidance by suppliers, especially in the online sector, who do not charge VAT and therefore obtain an unfair advantage against businesses in the UK.

From 1 September 2017, advisers who promote VAT avoidance schemes will become primarily responsible for disclosing the schemes to HMRC. The penalty regime will also be strengthened, to apply to businesses and company officers who knew or should have known that their transactions were connected with VAT fraud.

The Government also announced it will issue clarification on the VAT relief available on adapted cars for wheelchair users in order to stop what it considers to be abuse of the zero-rating provisions. 


Insurance Premium Tax (IPT) increased to 12% from June 2017

The standard rate of IPT will rise from 10% to 12% from 1 June 2017. As this is a tax, which operates broadly like VAT, the change is likely to increase the overall cost of insurance for consumers.

The standard rate of IPT will have been doubled within the space of less than two years.

Before 1 November 2015, when it increased to 9.5%, the standard rate of IPT was only 6%. A subsequent increase to 10% was announced at Budget 2016, taking effect from 1 October 2016, with the justification that it would enable investment in improving flood defences.

There is no indication that this latest 2% increase has been earmarked for a specific cause.


Read our full commentary here.

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