‘Effective from 1 April 2017, The VAT flat rate scheme (FRS) for businesses with limited cost is set to increase to 16.5% from their current rate, based on defined criteria for a limited cost trader.’

What is a Limited Cost Traders?

According to HMRC guidance, a limited cost trader will be defined as one whose VAT inclusive expenditure on goods are 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 annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000)

Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:

  • capital expenditure
  • food or drink for consumption by the flat rate business or its employees
  • vehicles, vehicle parts and fuel (except where the business is one that carries out transport services – for example a taxi business – and uses its own or a leased vehicle to carry out those services)

So how will this affect Contractors and Freelancers?

Since a lot of contractors might not have many business expenses, they should consider the potential impact if they are going to be classified as a limited cost trader.

Included below is an example of how the change might affect Dave, an IT consultant who has a turnover of £100k but minimal business expenses:


As per our illustration above, the introduction of 16.50% VAT flat rate for limited cost traders will almost nullified the entire VAT FRS gain received by Dave before 1 April 2017.

Therefore, Dave could be more beneficial to deregister from FRS and be better off by claiming input VAT under the standard VAT scheme if his business expenses is over £1,200 (including VAT).

We will be sending out individual VAT review for each of our clients who are currently using VAT Flat Rate Scheme after the festive period in preparation to the new legislation.


If you are not our client but would like to know more about the new flat rate, please contact on 0207 078 0211 or [email protected].

Disclaimer: The above information is based on the announced Autumn Statement 2016 and subject to further amendment after the release of the draft secondary legislation, which will be published on 5 December 2016.