What is a limited cost trader?
Definition of limited cost trader
A limited cost trader is a business that has to use a special percentage - 16.5% - for the VAT flat rate scheme. The limited cost trader option will apply from 1st April 2017.
If you're not using the VAT flat rate scheme, the limited cost trader rules don't apply to you.
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How do you know if you're a limited cost trader?
HMRC says that a limited cost trader is a business that buys only a few goods. More specifically, a limited cost trader's spend on goods, including VAT, in a quarter is:
- less than 2% of its VAT-inclusive sales for that quarter,or
- more than 2% of its VAT-inclusive sales for that quarter, but less than £250
This figure should exclude the cost of the following items:
- food and drink for the business or its staff
- capital expenditure
- vehicles, vehicle parts and fuel (unless your business uses its own vehicles in the transport business, for example if you run a taxi hire firm)
What you need to do if you're a limited cost trader
From 1st April 2017 you'll need to check how much you've spent on goods each quarter and see how this figure compares to the specifications above.
If it turns out that you are a limited cost trader, you need to apply the 16.5% limited cost trader percentage to your VAT-inclusive sales for that quarter when you're working out how much to pay HMRC - don't use the usual rate for your trade.
Got questions? Ask Emily!
FreeAgent's Chief Accountant Emily Coltman is available to answer your questions in the comments.