Glossary · UK
What is Flat Rate Scheme: Limited Cost Trader?
Businesses spending less than 2% of turnover on goods pay a flat 16.5% VAT rate, limiting flat rate scheme benefits.
Full Definition
The VAT Flat Rate Scheme (FRS) was designed to simplify VAT accounting for small businesses, allowing them to pay a fixed percentage of gross turnover to HMRC rather than tracking input and output VAT separately. However, from April 2017 HMRC introduced the 'limited cost trader' category for businesses that spend less than 2% of their VAT-inclusive turnover on goods (or less than £1,000 per year even if that is more than 2%). Limited cost traders must use a flat rate of 16.5%, which typically means they pay over almost all the VAT they collect with little benefit. Labour-intensive businesses such as IT consultants, cleaners, and some contractors commonly fall into this category. For 2026/27 the VAT registration threshold remains £90,000 of taxable turnover.