The CIOT have submitted comments to HMRC on the proposed new ‘limited cost trader’ category for the VAT Flat Rate Scheme: they recommend HMRC seek a different approach to tackling abuse of the scheme.

From April 2017 HMRC will introduce a new category of trader to the VAT Flat Rate Scheme (FRS), a ‘limited cost trader’ with a percentage of 16.5%. The new rate has been introduced with the aim of countering abuse of the FRS. 

The CIOT highlight are concerned that HMRC's proposals to amend the FRS:

  • Are unlikely to prevent abuse: there are loopholes which can be exploited and systematic abusers are likely to ignore the changes anyway.
  • Introduce a significant level of complexity into a scheme that is meant to be a simplification measure.
  • Will result in a high level of collateral damage: HMRC have underestimated their impact both in terms of the number of businesses affected and the financial costs.

They recommend that HMRC consider alternatives ways to tackle FRS abuse, such as:

  • Restricting the FRS to businesses required to be registered for VAT (and not just eligible to register).
  • Tightening up the associated business rules, or introducing a revenue protection measure to allow expulsion from the FRS.
  • Considering the long-term future of the FRS under Making Tax Digital.

The CIOT also note that many FRS structures also seek to abuse the Employment Allowance rules.  They recommend HMRC take a joined-up approach to these schemes rather than just focusing on the FRS alone.


Our subscriber guide: Flat Rate Scheme: limited cost trader

The CIOT's press release can be found here.

Do you like our content and want to know more? Sign up now * for Nichola's FREE SME tax news, tips and topical more

*There are no strings attached: you will be free to unsubscribe at any time and we don't pass on anyone's details to anyone else and as you can see we don't blur our content with annoying adverts.