Am I a limited cost trader for VAT purposes?

You are a limited cost trader if your spending on goods (not services) is less than 2% of your VAT-inclusive turnover, or less than £1,000 a year, whichever is the greater threshold. Most contractors providing services with minimal equipment purchases fall into this category, which means a fixed 16.5% Flat Rate Scheme rate applies regardless of sector.

Is the VAT Flat Rate Scheme worth it for contractors?

It depends on your sector's FRS rate and how much you spend on goods. For IT contractors classed as limited cost traders paying 16.5%, the scheme typically generates a smaller surplus than sector-specific rates like 14.5%. Contractors with higher goods spending may benefit more from standard VAT accounting, which allows full input VAT recovery.

🧮 Free tool — 2025/26 & 2026/27 Contractors & Freelancers

VAT Flat Rate Scheme calculator

The VAT Flat Rate Scheme can generate a small annual surplus for contractors with low business costs — but the 2017 "limited cost trader" rules mean it doesn't work for everyone. Enter your turnover and typical costs to see whether FRS or standard VAT accounting is better for you.

Figures are illustrative only, based on 2025/26 and 2026/27 HMRC rates and standard assumptions. They do not constitute financial or tax advice. Your actual position will depend on your specific circumstances — book a free call with AutoBooks for personalised guidance.

Compare FRS vs standard VAT

Adjust the inputs — the results and summary update instantly.

Annual turnover (excl. VAT) £100,000

Annual spending on goods (not services) — equipment, stock, materials £1,000

Your sector

Limited cost trader?

Your FRS rate

14.5%

FRS annual surplus/cost

£0

Standard scheme benefit (input VAT reclaimed)

£0

Better option for you

—

Annual difference

£0

This is a simplified comparison. The Flat Rate Scheme has other considerations — including a 1% discount in your first year of VAT registration, and restrictions on reclaiming VAT on most services (only capital goods over £2,000 are reclaimable under FRS). Speak to your accountant before switching schemes.

How the VAT Flat Rate Scheme works

Under standard VAT accounting you charge clients 20% VAT, reclaim the VAT on your purchases, and pay HMRC the difference. Under the Flat Rate Scheme you still charge clients 20%, but instead of reclaiming input VAT you pay HMRC a fixed percentage of your VAT-inclusive turnover. The gap between the 20% you charge and the lower flat rate you hand over is a small surplus you keep — but you generally give up the ability to reclaim VAT on purchases.

What affects whether FRS is worth it

Goods spending vs turnover — if you spend little on physical goods, you're likely caught by the limited cost trader rules.
Limited cost trader status — forces a flat 16.5% rate regardless of sector, which wipes out most of the FRS surplus.
Your sector's FRS rate — IT 14.5%, consultancy 13%, and so on (verify against the current HMRC rate table).
The first-year 1% discount — a small extra benefit in your first year of VAT registration.

Worked example

An IT contractor with £100,000 turnover spending £500/year on goods:

The limited cost trader threshold is the greater of £1,000 or 2% of turnover (£2,400). £500 is below that, so the contractor is a limited cost trader.
That forces the 16.5% rate rather than the IT sector's 14.5%. FRS VAT payable = £120,000 × 16.5% = £19,800, against £20,000 VAT charged — a surplus of just £200.
At 14.5% (if they weren't caught) it would have been £120,000 × 14.5% = £17,400 — a £2,600 surplus. The limited cost trader rule costs this contractor £2,400 of surplus.
Under standard VAT, with only £500 of goods, input VAT reclaimed is about £100 — so for a pure-service contractor with tiny costs the two schemes are close, and the FRS first-year discount can tip it.

What to do next

AutoBooks reviews your VAT scheme every year as standard, including checking your limited cost trader status. Full-service contractor accountancy is £89+VAT/month, all-in.

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Is your VAT scheme still the right one?

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