The following article covers:
What is a Limited Cost Trader?
You’re a Limited Cost Trader if the amount you spend on relevant goods including VAT is either:
Less than 2% of your VAT flat rate turnover (in a prescribed accounting period)
Greater than 2% of turnover including VAT, but less than £1000 per year (if the prescribed accounting period is one year). If it is not one year e.g. quarterly VAT returns, the figure is the relevant proportion of £1000, for a quarterly return this is £250
What is the expenses test?
In order to continue benefiting from your current FRS percentage based on your job title, you will need to prove that your qualifying business expenses are both: More than £1,000 per year; and greater than 2% of your turnover, reviewed each quarter, inclusive of VAT.
What are the qualifying expenses?
Only certain expenses can be used to meet the requirements of the test, which HMRC calls ‘goods’. Examples of these are: Materials used for your job, for example any consumables, timber, fixings, cables, hardware, aggregate, etc; Equipment and tools, for example hand tools, testing equipment, certain power tools, etc; Hire of any plant, powered equipment, etc; Health & safety equipment and clothing, including personal protective equipment; stationery, materials and books
What expenses can’t be used for the test?
Any ‘capital expenditure’ (i.e. large purchases that generally have a useful life of more than one year, for example a laptop or mobile phone); Food or drink purchased whilst out of the house for work; Vehicles, vehicle parts and fuel (except where the business is one that carries out transport services, for example a taxi or courier business).