Limited Cost Trader Test – How It Affects Flat Rate VAT

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Most probably, Flat Rate VAT schemes are not the first thing that comes to your mind when you wake up in the morning. However, if you are a VAT registered small business, then this is something that you need to consider.

VAT is the tax imposed on some goods and services. VAT registered companies have to charge VAT on their sales, however, they will be able to recover VAT on their purchases. Take note that this will require an accurate record-keeping on every transaction as well as the rate of VAT that is charged to you.

What Is The Flat Rate VAT Scheme?

Record-keeping can be a great burden on smaller companies, that is why HMRC provides them with a Flat Rate Scheme. So, in this scheme instead of paying HMRC the amount that you have collected in VAT  for your sales minus the amount of VAT that you have obtained on your expenses, you only need to pay HMRC a certain percentage of your sales. Generally, this means that small companies are not required to monitor VAT on purchases.

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Why Did It Change?

According to the Treasury, one of the causes of the decrease in tax revenues is the growing numbers of self-employed. Nevertheless, based on our research and experience, people want to own companies because of commercial purposes and not to avoid tax. The Treasury thinks that these VAT schemes were very reasonable and a lot of companies are actually using them.

What Does The Flat Rate VAT Scheme Mean To The Limited Cost Trader?

The 16.5% flat rate VAT scheme has been used since April 2017 by several labour-only companies including contractors. This means that there is an increase in the rate of  VAT when using the Flat Rate scheme. Consequently, for a lot of businesses, they won’t be able to enjoy the benefits of flat-rate VAT compared to the standard rate VAT. It is important that you should talk to your accountant about this since they can give you some advice on the accurate VAT scheme that you have to use. Or perhaps you could choose to deregister from VAT in case your turnover is less than the threshold.

Who Exactly Does This Apply To?

Labour-only companies such as limited cost traders will have to apply the 16.5% rate in the event that they would prefer to use the Flat rate. In order to figure out the amount that you need to spend on goods, you must not include expenses for capital goods such as new equipment, vehicles or parts of the vehicle except if you have a vehicle running business or food and drink including lunches for your employees.

In case the company spends below £1,000 for a particular accounting period, they can also be considered as labour-only regardless if this is greater than 2% of their sales. For those whose accounting period is less than or more than twelve months, then you can expect that the £1,000 threshold is pro-rated respectively.

Q&A About The Limited Cost Trader Test And The Flat Rate VAT Scheme

Here, we have gathered some Q&A based on your questions to help you further understand more about the limited cost trader test.

If I am on the Flat Rate Scheme, can I still obtain the 1% discount during the first year of VAT registration?

Absolutely, HMRC affirmed that this is still available.

How many times do I need to apply the limited cost trader test?

In case you are on the flat rate scheme, you will be required to apply the limited cost trader test in each VAT period.

Generally, the limited cost trader rules can greatly affect contractors with low disbursement. So, what can contractors do so they can avoid being categorised as such and retain the flat rate VAT rates?

Well, this will greatly depend if you have purchased any goods during a given VAT period. If the total amount of the goods that you have purchased is less than 2% of turnover during the same period or less than £1,000 during a particular year, then you will be required to apply the limited cost trader rate.

What if your trade sector belongs to printing, which has a flat rate of 8.5%, when should you apply these rules?

If you were able to satisfy the criteria for a Limited Cost Trader, then you will be using a rate of 16.5%. But since you are in the printing industry, then it is expected that for this particular trade you will have numerous applicable goods such as the paper and ink to be used for printing. Hence, for many printers, the cost of goods would be over 2% of turnover, which means that the rules would not be applicable.

Being a limited cost trader, can I claim VAT on the goods which cost more than £2,000. I’m actually planning to buy a new Mac.

According to the rules, any business which is on the flat rate scheme can still claim VAT on the goods that cost over £2,000.

Can the cost of a subcontractor be considered as a capital good when implementing the Limited cost trader test?

Sadly no since services are excluded.

The expenses for my company includes accountancy, wages, subsistence, travel costs, travel costs, telephone costs as well as software rental. How will I know whether I pass or fail on this test?

Most likely, you will be affected. Eventually, a greater part of the service-based companies will likely be affected. In order to help you figure out what are the items that are not counted as applicable goods, here are some samples. Advertising expenses, accountancy fees, food and drink both for you and your staff, equipment leasing, mobile phone or laptop used by your business since this is considered as a capital expenditure, fuel for a vehicle except if the business is operating in the transport sector using their own or a leased vehicle, rental, downloaded software, a bespoke software particularly designed for you since this is considered as a service even if it is not provided electronically and anything which is supplied electronically, for instance, a downloaded magazine.

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