A limited cost trader is a business on the VAT Flat Rate Scheme that spends very little on goods, and is therefore required to use the highest flat rate of 16.5%. The category was introduced in April 2017 specifically to remove the cash advantage that labour-only businesses, including most contractors, used to gain from the scheme.
A business is a limited cost trader in a VAT period if its spend on goods is either less than 2% of its VAT-inclusive turnover, or more than 2% but less than £1,000 a year (pro-rated for the period). Crucially, "goods" excludes services, capital expenditure, food and drink, vehicles and fuel (with limited exceptions), so the things a contractor typically spends on do not count towards the test.
The practical effect is that a labour-only contractor will almost always fall into the limited cost trader category and pay 16.5% on VAT-inclusive turnover, which is close to the full 20% standard rate and leaves little or no benefit from the FRS. The test is applied every VAT period, so it must be checked each quarter. For most contractors this is the reason the firm rarely recommends the Flat Rate Scheme. See VAT Notice 733 for the detailed rules.