What is a Limited Cost Trader?

Limited Cost Trader

A limited cost trader is defined by the UK’s HM Revenue and Customs (HMRC) as a business that spends less than 2% of its VAT flat rate turnover on goods (excluding services) over the period covered by a VAT return (which is typically quarterly). These businesses are eligible to use the Flat Rate VAT Scheme (FRS) with a flat rate of 16.5%.

The FRS is typically used by small businesses that make primarily labor-based sales, such as:

• Construction workers
• Cleaners
• Hairdressers
• Consultants
• IT professionals

Benefits of Using the Flat Rate VAT Scheme as a Limited Cost Trader

Using the FRS as a limited cost trader offers several benefits, including:

• Simplified VAT calculations: The FRS eliminates the need to track and separate VAT on goods and services, making VAT calculations much simpler.
• Reduced VAT payments: The 16.5% flat rate is often lower than the standard VAT rate of 20%, potentially reducing VAT payments.
• Improved cash flow: The FRS allows businesses to keep more of their money, as they only pay VAT on a percentage of their turnover, rather than on the full value of their sales.

How to Determine if You Are a Limited Cost Trader

To determine if you qualify as a limited-cost trader, you need to calculate the percentage of your VAT flat rate turnover that you spend on goods. This can be done by following these steps:

1. Identify your VAT flat rate turnover. This is the total value of your sales, excluding VAT, over the period covered by your VAT return.
2. Calculate your total spending on goods. This includes the cost of all goods purchased, excluding VAT.
3. Divide your total spending on goods by your VAT flat rate turnover and multiply by 100 to express the result as a percentage.

If your calculated percentage is less than 2%, you are considered a limited-cost trader and can use the FRS with the 16.5% flat rate.

Important Considerations for Limited Cost Traders

While the FRS offers several benefits for limited-cost traders, there are a few important considerations to keep in mind:

• The 16.5% flat rate may not always be beneficial. If you spend a significant amount on goods, the 16.5% flat rate may result in higher VAT payments than using the standard VAT scheme.
• The FRS is not suitable for all businesses. Businesses that make significant sales of goods may be better off using the standard VAT scheme to claim input tax credits on their purchases.
• The FRS requires quarterly VAT returns. Businesses using the FRS must submit quarterly VAT returns, even if their turnover is below the VAT registration threshold.

Conclusion

The Flat Rate VAT Scheme can be a valuable tool for limited-cost traders, offering simplified VAT calculations, reduced VAT payments, and improved cash flow. However, it is important to carefully consider whether the FRS is right for your business and to understand the potential implications before making the switch.