Limited cost trader - What is a limited cost trader?

A limited cost trader is a term used to identify a business who will need to pay a higher VAT rate on the flat rate scheme. The company will need to pay a 16.5% flat rate if they meet the conditions of a limited cost trader.

Want to learn more about the advantages and disadvantages of the Flat Rate VAT Scheme? Read more on our blog: ‘Working with the UK Flat Rate VAT Scheme’.

Limited cost trader, also referred to as limited cost business, is a type of business category that was introduced by HMRC to avoid potentially misusing the Flat Rate VAT Scheme.

Who is considered a limited cost trader?

The 16.5% flat rate will apply to any business that is considered a limited cost trader. Your business falls into this category if one of the following applies:

• The VAT inclusive cost of purchasing goods is less than 2% of your annual turnover
• The VAT inclusive cost of purchasing goods is more than 2% of your annual turnover, but less that £1000 per year

The goods included in these calculations have some restrictions which I will outline in the next section.

If your business does not meet these conditions, you can find the correct VAT flat rate for your business on the UK Government website.

Limited cost trader - relevant goods

To calculate if you fall within the category of a limited cost trader, you must first calculate your annual VAT inclusive amount of goods purchased.

This includes any goods used strictly for business purposes, except for the following:

• Capital expenses - any goods bought to be used over a long period of time, such as a computer
• Food and beverages purchased for the business or employees
• Anything related to vehicles (fuel, car purchase, parts, etc.) unless your business is a transport service such as a taxi company

If you add up all of the goods purchased in the year, excluding the ones mentioned above, and it amounts to less than 2% of your turnover or under £1000, then you are a limited cost trader.

Limited cost trader and Debitoor

Invoicing software can help you manage all aspects of your business finances. With Debitoor, you have the option of selecting the VAT Flat Rate Scheme and inputting your flat rate percentage.

Your accounting reports will automatically reflect the correct data with the flat rate. With Debitoor, you can also submit your VAT Report directly to HMRC in just a few clicks.

Anytime you create an invoice, enter an expense, or add a payment, the reports such as you balance sheet will reflect the new information in real-time.

Ready to make VAT reporting simple? Get started with a 7-day trial.