Answers · UK 2025/26
What is the limited cost trader rate for the VAT Flat Rate Scheme?
Limited cost traders pay VAT at 16.5% under the Flat Rate Scheme, leaving minimal benefit compared to standard VAT accounting.
Full answer
HMRC introduced the 16.5% limited cost trader rate in 2017 to remove the profit opportunity from service businesses using the Flat Rate Scheme (FRS). A business is a limited cost trader if its VAT-inclusive expenditure on goods is either less than 2% of its VAT-inclusive turnover, or less than £1,000 per year. Most service businesses (IT contractors, consultants, freelancers, cleaners) fall into this category since they spend very little on goods. The FRS rate for a limited cost trader is 16.5% of gross (VAT-inclusive) turnover, which typically means keeping only a tiny margin of 3.5% on standard-rated sales. Non-limited-cost businesses get lower sector rates (e.g., IT consultancy 14.5%).
This answer is informational only and does not constitute financial, tax or legal advice. Figures are for the 2025/26 UK tax year. See our methodology and sources.