The VAT Flat Rate Scheme & Relevant Goods: How Regular Reviews Could Save You from a Costly Surprise

2 Sept

The VAT Flat Rate Scheme (FRS) is popular with small businesses for one big reason — simplicity. Instead of calculating VAT on every sale and purchase, you apply a fixed percentage to your gross turnover and pay that amount to HMRC.

But there’s a catch. Since April 2017, HMRC has enforced new rules for limited cost traders. If you’re not monitoring your relevant goods spending closely, you could be hit with an unexpected — and expensive — VAT bill.

What counts as “Relevant Goods”?

Relevant goods are physical items you buy wholly and exclusively for running your business. But not all purchases qualify.

They must be:

Tangible goods (not services)
Used directly for your business activity
Not classed as capital expenditure

✅ Examples of relevant goods:

Stock purchased for resale
Tools or equipment used in your trade
Specific stationery or office supplies directly used in your work

❌ Examples of non-relevant goods:

Vehicles or fuel (unless you’re in the transport business)
Rent, utilities, or phone bills
Accountancy fees
Food and drink for staff or yourself

The Limited Cost Trader Rule

You’re classed as a limited cost trader if your spending on relevant goods is:

Less than 2% of your VAT-inclusive turnover for a VAT period, OR
Less than £1,000 per year (pro-rated for shorter periods)

If you fall into this category, you must use the 16.5% flat rate — much higher than many standard FRS rates.

Why regular reviews are critical

It’s easy to assume your spending is fine, but things change — seasonal dips in stock purchases, supplier changes, or a shift in your business model can suddenly drop you below the 2% threshold.

If HMRC finds you should have been classed as a limited cost trader after the fact, they can backdate the 16.5% rate to previous periods — meaning you’ll have to pay the difference.

Example: A Designer’s £1,800 Surprise

Graphic Designer (Not Limited Cost Trader)

Turnover (incl. VAT): £40,000
Flat rate: 12% → £4,800 VAT paid to HMRC

Graphic Designer (Limited Cost Trader)

Same turnover but <2% relevant goods spend
Flat rate: 16.5% → £6,600 VAT paid to HMRC

💡 Extra VAT owed: £1,800 — all because the threshold was missed.

Common Flat Rate Scheme Rates for 2025

Hairdressing & beauty: 13%
Catering services: 12.5%
IT consultancy: 14.5%
Limited cost traders: 16.5%

The takeaway for small businesses

The Flat Rate Scheme can still save time and hassle — but only if you’re on the right rate and keeping an eye on relevant goods spending.

Action points:

Check your relevant goods percentage every VAT quarter
Adjust your rate mid-year if you fall below 2%
Speak to your accountant before your VAT anniversary date to avoid surprises

Being proactive can save you hundreds (or even thousands) in unexpected VAT payments — and keep your cash flow healthy.

Ben Phillips