Glossary · UK
What is Limited Cost Trader?
A VAT Flat Rate Scheme classification for low-spending businesses, requiring them to use a higher fixed flat rate of 16.5 per cent.
Full Definition
A limited cost trader is a classification within the VAT Flat Rate Scheme, introduced to stop low-spending businesses gaining an unintended tax advantage. Under the Flat Rate Scheme, a business pays VAT as a fixed percentage of its gross (VAT-inclusive) turnover rather than accounting for VAT on each sale and purchase. You are a limited cost trader if your spending on relevant goods is less than 2 per cent of turnover, or more than 2 per cent but less than GBP 1,000 a year. If you fall into this category you must apply the higher flat rate of 16.5 per cent, regardless of your trade sector, which usually removes most of the scheme's benefit. The test is applied for each VAT period. Many service-based businesses, such as consultants and contractors with few material costs, are caught by it. The standard VAT rate is 20 per cent and the registration threshold is GBP 90,000 for 2026/27.