Flat Rate VAT Scheme and Limited Cost Traders

A business is a limited cost trader if its VAT inclusive expenditures on relevant goods is either:

• Less than 2% of your VAT Flat rate turnover
• Greater than 2% of your VAT flat rate turnover but less than £1,000 per year or £250 for the quarter

You are required to check every quarter if you are categorized as a limited cost trader or not. You could be a limited cost trader for one VAT period, and then back to your usual flat rate category for another.

You can check your status for each VAT quarter by using HMRC online tool. Please follow the below link Check your VAT flat rate

What counts as relevant goods?

The relevant goods are used exclusively for the purposes of your business, but will not include the following:

• vehicle costs including fuel, unless you’re operating in the transport sector using your own, or a leased vehicle
• food or drink for you or your staff
• capital expenditure goods of any value
• goods for resale, leasing, letting or hiring out if your main business activity doesn’t ordinarily consist of selling, leasing, letting or hiring out such goods
• goods that you intend to re-sell or hire out, unless selling or hiring is your main business activity
  any services

HMRC have given the below examples of relevant goods, this is not an exhaustive list:

• stationery and other office supplies to be used exclusively for the business
• gas and electricity used exclusively for your business
• fuel for a taxi owned by a taxi firm
• stock for a shop
• cleaning products to be used exclusively for the business
• hair products to use to provide hairdressing services
  standard software, provided on a disk

HMRC have also given the below examples of items that are NOT relevant goods:

• accountancy fees, these are services
• advertising costs, these are services
• an item leased/hired to your business, this counts as services, as ownership will never transfer to your business
• food and drink for you or your staff, these are excluded goods
• 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, this is excluded as it is capital expenditure
• anything provided electronically, for example a downloaded magazine, these are services rent, this is a service
• software you download, this is a service
• software designed specifically for you (bespoke software), this is a service even if it is not supplied electronically

Options available to Limited Cost Traders
If you are a limited cost trader, then you should consider the following options:

1.Pay Flat Rate VAT at the rate of 16.5%
Your VAT liability will be calculated on the new rate from 1 April 2017 which is 16.5% for low cost traders. This will be applied to your VAT inclusive turnover.

2.De-register for VAT

If your company annual turnover falls below the de-registration threshold of £85,000 (from 1 April 2017) then you are entitled to de-register from VAT.

The following are the implications for the de-registrations:

• You will not able to claim VAT on any business expenditures
• It will reduce the administrative load in your company
• You will have a competitive advantage if most of your customers are not VAT registered

3.Standard Rate VAT Scheme

If your company annual turnover is more than £85,000, you will be required to remain VAT register but can leave Flat Rate VAT Scheme. You will charge VAT on your sales and would be able to claim VAT on your business expenses.