Flat Rate VAT – Limited Cost Businesses

What is a limited cost business?

This only applies to businesses on the flat rate VAT scheme.

‘Limited cost traders’ are businesses that have to use the 16.5% rate when using the Flat Rate VAT scheme. As opposed to the specific reduced flat rate set for their industry. This means they’ll need to pay extra VAT to HMRC if they meet the ‘Limited cost trader’ test.

A limited cost trader is defined as one that spends less than 2% of the value of its sales on goods. Over the period they submit a VAT return (usually quarterly). Importantly, costs for services aren’t included in the 2%.

Exclusions to the 2% spent on goods

  • Services (like accounting and IT)
  • capital goods (such as new equipment used in a business)
  • food and drink (such as lunches for staff)
  • vehicles or parts for vehicles (unless running a vehicle hiring business).
  • If a firm spends less than £250 in their accounting period (i.e. the VAT quarter), they also count as ‘labour-only’ even if this is more than 2% of sales.

Other questions:

Do I still get the 1% discount in the first year of VAT registration when on the Flat Rate scheme?

Yes.

How frequently do you have to apply the test?

When on the flat rate scheme you need to apply the limited cost trader test every VAT period.

As a limited cost trader will you be able to claim VAT back on goods costing over £2,000. I’m thinking of purchasing an expensive new laptop.

A business on the flat rate scheme can reclaim VAT on goods that cost more than £2,000.

My company expenses consist of salary, accountancy, some travel costs, the odd subsistence expense, software rental, and telephone costs. Would I be considered a Limited cost trader?

It’s likely. Here are some examples of items that won’t be included as applicable goods:

  • Accountancy fees;
  • Advertising costs;
  • Hiring of equipment (this counts as services);
  • Food and drink for you or your staff;
  • Fuel for a car (this is excluded unless operating in the transport sector using your own, or a leased vehicle);
  • Laptop or mobile phone for use by the business (excluded as it is capital expenditure);
  • Anything provided electronically, for example, a downloaded magazine;
  • Rent;
  • Software you download;
  • Bespoke software designed specifically for you (this is a service even if it is not supplied electronically).

James Watson