If you run a taxi or chauffeur business in the UK, understanding VAT rules is crucial to managing your finances efficiently. The Flat Rate Scheme (FRS) for VAT can simplify your VAT obligations, but it also comes with important considerations, such as the 2% test for relevant goods.
In this guide, we’ll break down how the Flat Rate Scheme works for taxi and chauffeur businesses, how to determine if you’re a limited cost trader, and whether fuel costs and subcontractor expenses count towards your relevant goods.
What does the VAT Flat Rate Scheme (FRS) mean?
The Flat Rate Scheme (FRS) makes it easier for small businesses to figure out their VAT. Firms that use FRS pay HMRC a set portion of their VAT-inclusive turnover instead of separately claiming VAT on purchases and charging VAT on sales.
The standard FRS percentage for cab and chauffeur businesses is 10% of gross turnover. This means that you keep the difference between how much VAT you charge (20%) and how much you pay HMRC.
The flat rate scheme works like this:
- You charge a customer £120 (including £20 VAT at 20%) for a ride.
- Under FRS (10%), you pay £120 × 10% = £12 to HMRC.
- This means you keep £8 of the VAT collected.
Eligibility for FRS
With the Flat Rate Scheme, you can only pay VAT on sales that are less than £150,000 a year (not including VAT). You can stay in the plan until your sales reach or go over £230,000 (including VAT).
The 2% Test & Limited Cost Trader Rule
What is the meaning of a Limited Cost Trader?
The limited cost seller rule was made by HMRC to stop companies from getting too much out of FRS. If your business is a limited cost trader, you have to use a higher flat rate of 16.5%, which takes away from the benefits of the plan.
A business is a limited cost trader if its spending on relevant goods is less than 2% of its turnover or less than £1,000 per year.
What Counts as Relevant Goods for the 2% Test?
To avoid being classified as a limited cost trader, you need to ensure you spend enough on relevant goods.
✅ Goods That Count:
- Fuel (✅ ONLY if you own or lease the vehicle used for transport)
- Vehicle parts and repairs
- Office stationery and supplies
- Cleaning products for your vehicles
- Tools and equipment used exclusively for your business
🚫 Goods That Do NOT Count:
- Fuel for subcontractors’ vehicles
- Vehicle insurance, MOT, road tax, and breakdown cover
- Vehicle hire or rental costs
- Subcontractor payments (e.g., hiring other drivers)
- Advertising and marketing expenses
- Computers, mobile phones, or other capital purchases
- Food, drink, and accommodation expenses
How Fuel Costs Affect Your FRS Status
One key issue for taxi and chauffeur businesses is whether fuel costs count towards the 2% test.
✅ Fuel CAN count as relevant goods IF:
- The business owns or leases the vehicle used for transport.
- The business pays for the fuel directly.
🚫 Fuel does NOT count if:
- The vehicle belongs to a subcontractor.
- The business does not own or lease the vehicle being used.
Example:
- If a chauffeuring company leases a fleet of cars and pays for fuel, these fuel costs count towards the 2% test.
- If the business contracts self-employed chauffeurs who pay for their own fuel, this does not count.
Should Taxi & Chauffeur Businesses Use FRS?
Pros of Using FRS:
✅ Simplified VAT reporting – no need to track VAT on every purchase
✅ Lower VAT payments (if not a limited cost trader)
✅ Predictable VAT payments – helps with cash flow management
Cons of Using FRS:
🚫 If classified as a limited cost trader, you must pay 16.5% – which may be more expensive than standard VAT accounting.
🚫 No VAT reclaims on major expenses – including vehicle purchases and repairs.
🚫 Not suitable for businesses with high input VAT costs.
How to Apply for the Flat Rate Scheme
If you decide the Flat Rate Scheme is the right choice for your business, you can apply via HMRC’s VAT online services:
- Log in to your Government Gateway account.
- Navigate to VAT services.
- Choose the option to apply for the Flat Rate Scheme.
You can also apply when registering for VAT by selecting FRS as your preferred scheme.
Conclusion: Is FRS Right for Your Taxi or Chauffeur Business?
The VAT Flat Rate Scheme (FRS) can be a useful option for taxi and chauffeur businesses looking to simplify VAT accounting and reduce VAT payments. However, you must carefully assess whether you meet the 2% test to avoid being classified as a limited cost trader and facing the 16.5% flat rate.
🚗 If your business owns or leases vehicles and pays for fuel, FRS can be beneficial.
🚗 If you rely on subcontractors or have minimal relevant goods, FRS may not be the best choice.
Need Help with VAT for Your Taxi Business?
If you’re unsure whether the Flat Rate Scheme is right for you, consider speaking to a tax professional or accountant who specializes in VAT for transport businesses.
👉 Have questions about FRS? Drop them in the comments below!
Disclaimer
This article has just informative value; it does not provide legal, financial, or tax advise. Although we work to guarantee accuracy, tax laws could change and personal situations vary. For individual advice on VAT and the Flat Rate Scheme, we advise seeing a trained accountant or tax practitioner.
