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.
If you're not using the VAT Flat Rate Scheme, the limited cost trader rules don't apply to you.
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
If you're a limited cost trader, 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.
Disclaimer: The content included in this glossary is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this glossary. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.