Limited Cost Trader – who’s it for and what does it mean?

If your business is on the Flat Rate VAT scheme, you need to work out if you are a Limited Cost Trader every time you submit a VAT return. It’s a relatively simple process, which is there to stop businesses that pay Flat Rate VAT and also have low operating costs profiting unfairly from being on the scheme.

Flat rate vat scheme abuse

Under the Flat Rate Scheme, you keep the difference between the VAT you charge customers (which can be as much as 20%) and the flat rate of VAT you pay HMRC (which can be as little as 4%). However, you can’t reclaim the VAT you’ve paid on goods and services you’ve bought yourself. So businesses with low running costs (i.e, ‘limited cost traders’) could profit more from being on the Flat Rate Scheme than businesses whose running costs were high. HMRC called this ‘Aggressive Abuse of the VAT Flat Rate Scheme’ and introduced the Limited Cost Trader category to prevent it.

So how does ‘Limited Cost Trader’ prevent such abuse?

The flat rate of VAT you pay used to depend entirely on the business sector or category you worked in. For example, children’s clothing retailers paid a flat rate of 4% VAT whilst an IT consultant paid 14.5%. On April 1, 2017, HMRC introduced a new category: Limited Cost Trader. Businesses in this category pay a flat rate of 16.5% regardless of the sector they are in, so they can no longer profit disproportionately in this way.

How can I tell if I’m a Limited Cost Trader?

A Limited Cost Trader is a business that spends less than 2% of its VAT inclusive turnover (or more than 2% of turnover but less than £1,000 per year) on ‘goods’. HMRC describes allowable goods as those that are used exclusively for the business such as stock for a shop, stationery or electricity for your business premises. However it excludes capital expenditure, food and drink for staff, vehicles, vehicle parts and fuel (unless you’re a transport business such as a taxi firm).

Is it worth staying on the Flat Rate VAT scheme?

It depends very much on your circumstances. You can work out how much VAT you’ll pay as a Limited Cost Trader using our simple VAT calculator. In some cases, you might be better off reverting to paying Standard Rate VAT or even de-registering if you are below the threshold for VAT.

Do I need to check if I’m a Limited Cost Trader for every VAT return?

Yes. You need to check if you’re a limited cost trader every time you fill in a VAT return because your status can change each time. So one period you might be a Limited Cost Trader, and the next you might pay your usual flat rate.?

Remember, if you are on the Flat Rate Scheme you will need to check whether you are a Limited Cost Trader every time you fill in a VAT return. Talk to your accountant or, if you are already a Numberworx customer, we will work out whether paying VAT as a Limited Cost Trader is the best option for you.