It was announced in the Autumn Statement that from April 2017, “businesses with limited costs, such as many labour-only businesses” will have their VAT flat rate percentage increased to 16.5% meaning they will be liable to pay hundreds, if not thousands of pounds in additional VAT liabilities each year.

The changes have been brought about as The Government believes that some trades have unfairly benefited from using the FRS, and hopes that a change to the way the FRS is calculated “will help level the playing field, while maintaining the accounting simplification for the small businesses that use the scheme as intended.”

What is a ‘limited cost trader’?

This is defined as a business which has VAT-inclusive goods (not services) expenditure of either:

  • Less than 2% of their VAT inclusive turnover in a prescribed accounting period
  • Greater than 2% of their VAT inclusive turnover but less than £1000 per year.

How will it work?

A business will check its actual spending on goods each quarter and identify whether it can submit the return based on its normal trade sector category percentage or whether it falls into the criteria above and therefore the 16.5% rate will apply.

To prevent businesses incorporating everyday purchases to increase their costs above the 2% threshold, the following expenditure will be excluded from the calculation:

  • Capital expenditure
  • Food or drink for consumption
  • Vehicles, vehicle parts and fuel (except for where the business is one that carries out transport services)
  • Rent, telephone and Internet charges (supplies of gas and electricity are classed as goods and included in the calculation)

Also only goods with 100% business use can be included in the 2% calculation. So, for example, an electricity bill with part business and part private use is excluded completely.

Limited cost traders will now need to make a decision on how to proceed:

  • To remain on the Flat Rate Scheme at rate of 16.5% which means no savings by being on the scheme.
  • Leave the Flat Rate Scheme but stay VAT registered.
  • Deregister from VAT entirely (turnover must be under deregistration threshold of £83,000 or falling below it).


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