Definition
A limited cost trader (HMRC calls it a “limited cost business”) is a business on the VAT Flat Rate Scheme whose spending on relevant goods, including VAT, is less than 2% of its flat rate turnover, or more than 2% but under £1,000 a year. It must use a flat rate of 16.5% whatever its sector, which removes most of the scheme’s benefit.
What counts as goods
Only goods used exclusively for the business count. Services are excluded, so accountancy fees, rent, advertising and downloaded software do not help. HMRC also excludes vehicle costs and fuel (unless the business is in the transport sector), food and drink for you or your staff, and capital items such as laptops and phones. Many consultants and contractors fall into the rule for this reason.
How the test is applied
The test is applied for each VAT return period, so a business can move between 16.5% and its sector rate. For a quarterly return, the £1,000 limit becomes £250.
A consultant with £72,000 of VAT-inclusive turnover pays £11,880 at 16.5%, keeping only £120 of the £12,000 VAT charged to clients, with no VAT on costs to reclaim. SmartFiling’s guide explains the limited cost business rule alongside the other VAT schemes.
Related questions
- Which VAT scheme is best for a small business? For many service businesses caught by this rule, standard accounting works out cheaper once VAT on costs is reclaimed.
- Can a limited cost trader leave the Flat Rate Scheme? Yes. A business can leave at any time by contacting HMRC, but must then wait 12 months before rejoining.
Related terms
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Flat Rate Scheme
The VAT Flat Rate Scheme is an HMRC scheme that lets a small VAT-registered business pay HMRC a fixed percentage of its VAT-inclusive turnover…
Read definition -
VAT return
A VAT return is the report a VAT-registered business sends to HMRC, usually every three months, showing how much VAT it charged on sales (output VAT)…
Read definition -
Input and output VAT
Output VAT (output tax) is the VAT a VAT-registered business charges on its sales. Input VAT (input tax) is the VAT it pays on goods and services bought for the business.
Read definition
