If you are using the VAT Flat Rate Scheme (FRS) you may have to use a special percentage (16.5%). You will have to consider this for every VAT accounting period.
How do you know if you're a limited cost trader?
HMRC says that a limited cost trader is a business that buys only a few goods. More specifically, a limited cost trader's spend on goods, including VAT, in a quarter is:
less than 2% of its VAT-inclusive sales for that quarter, or
more than 2% of its VAT-inclusive sales for that quarter, but less than £250
This figure should exclude the cost of the following items:
food and drink for the business or its staff
capital expenditure
vehicles, vehicle parts and fuel (unless your business uses its own vehicles in the transport business, for example, if you run a taxi hire firm)
What you need to do if you're a limited cost trader
If you're a limited cost trader, you'll need to check how much you've spent on goods each quarter and see how this figure compares to the specifications above.
If it turns out that you are a limited cost trader, you need to apply the 16.5% limited cost trader percentage to your VAT-inclusive sales for that quarter when you're working out how much to pay HMRC - don't use the usual rate for your trade.
How to work out whether you're a limited cost trader
HMRC have a simple calculator available to help businesses work out whether they’re a limited cost trader: VAT Flat Rate Scheme – What you pay.
Before you start you’ll need some basic information. Use the information that relates to your most recent VAT Return period. If you submit quarterly returns this will cover a 3-month period. If you submit annual returns this will cover a full year.