What is a limited cost business under the VAT Flat Rate Scheme?

HMRC’s test looks at relevant goods bought for the business, including VAT, against turnover including VAT. Broadly, you are a limited cost business where qualifying goods cost less than 2% of turnover, or more than 2% but less than £1,000 a year, adjusted for the period. For a normal three-month return, the second threshold is £250. Services such as accountancy, software subscriptions and rent do not count as goods. Capital purchases, food and drink for staff, and most vehicle costs are also excluded, with specific exceptions. Check the detailed definition rather than using the total expenses figure in your accounts as a shortcut.

A business that meets the limited cost test normally applies 16.5% to its VAT-inclusive turnover for that return period. This can leave much less benefit than the trade percentage you expected when joining the scheme. Spending patterns may change between periods, so last quarter’s result is not enough. Check the first-year discount separately if it applies, and remember that input VAT recovery under the scheme is restricted. CASS can compare the expected outcome with normal VAT accounting using your actual sales and purchases. Keep the workings for each return and check the timing rules before leaving the scheme, rather than assuming a change can be applied retrospectively.