Limited Cost Trader

The limited cost trader category was introduced on 1 April 2017, and its high rate of 16.5% gives minimal credit for input tax. It has wiped out many gains enjoyed by service-based businesses that spend less than £250 a quarter on goods, or less than 2% of their gross turnover. Don’t forget that a business needs to consider whether it is a Limited Cost Trader each time a VAT return is completed.

1% reduction

There is an automatic 1% discount on the relevant flat rate percentage, but it only applies for the first year of VAT registration. Some businesses apply this to the first year of registering for the flat rate scheme but it is only applicable in the first year of VAT registration. If you join the FRV scheme after six months of registering, you can enjoy a 1% deduction for the remaining six months.

Recording purchase invoices

The rules for recording invoices digitally under the new Making Tax Digital (MTD) rules are essentially the same as already exist. The only time that purchase invoices need to be recorded digitally by Flat rate VAT users, under the MTD rules, is if input tax is being claimed on an expense. This will only apply in the case of capital goods costing more than £2,000 including VAT, or for pre-registration input tax.

Hires Capital Goods

Flat rate VAT users can’t claim input tax on capital goods costing more than £2,000, including VAT, when the asset acquired is being either rented, leased or hired out.

Pre-registration input tax

A Flat rate VAT user can claim input tax on pre-registration expenses on its first return, subject to the usual rules:

  • Goods must have been bought within the four-year window before registration, used by the business during that time and are still owned on its first day of registration.
  • The purchase window for services is restricted to six months before the registration date.

Exempt and zero-rated income included

The Flat rate VAT scheme captures both exempt income and zero-rated sales made by the business, but not income that is outside the scope of VAT. From the 1st October 2020 it will include sales under the new CIS reverse charge. If you have sales that are exempt or zero-rated, the Flat rate VA schme will probably not be beneficial.

Joining and Leaving

The Flat rate VAT joining threshold anticipates the expected taxable sales in the next 12 months; the historic level of sales is irrelevant. If this figure is less than £150,000 excluding VAT, you can join.

A business does not need to leave the FRS until its gross annual sales including VAT have exceeded £230,000. The good news is that a business must only undertake the exit test once a year, on the anniversary date of when it first joined the scheme.

The Flat rate VAT scheme has undoubtedly suffered a reduction in popularity since the introduction of the limited cost trader rules in April 2017. However, a business can withdraw from the FRS at any time. This will usually be at the end of a VAT period, but it can also leave during a period.