As contractor accountants, we receive many frequently asked questions about VAT registration for limited companies. We help our accountancy clients register their limited companies for VAT, and we’re happy to advise on the VAT registration threshold, what VAT taxable turnover is, and how to register for VAT.
If you would like to know about how Making Tax Digital will affect VAT-registered businesses from 1st April, visit our Making Tax Digital for VAT guide.
What does it mean to be VAT registered?
Let’s begin with what VAT is and what being VAT registered means.
VAT stands for Value Added Tax, which is currently set at 20% in the UK. VAT is added to most products and services sold in the UK, excluding those that are zero-rated or exempt such as newspapers, books, certain nursing services and rent.
With regards to your limited company as a contractor, if you undergo VAT registration you will need to add VAT to invoices you raise. You will also add VAT if the place of supply is in the UK and the services provided are not exempt from VAT. This includes the services your company provides if it is over the annual VAT threshold.
If your company is VAT registered you can claim back the VAT on some of your VAT taxable business expenses – as long as you have a valid VAT receipt.
When a company registers for VAT, the director is required to submit quarterly VAT Returns. This includes quarterly VAT payments due to HMRC. Most VAT Returns are done online, but from 1st April 2019 will need to be submitted using Making Tax Digital-compatible software.
The VAT registration threshold
A company can voluntarily register for VAT if it suits the business financially, or if it’s believed there could be a benefit from reclaiming VAT on expenses. However there is a VAT threshold – a point at which a business must register for VAT.
A business, or in your case your limited company, must register for VAT when its VAT taxable turnover is more than £85,000 in a 12-month period. You can register your limited company for VAT at any point if you expect your annual turnover to reach the £85,000 threshold.
You must register your company for VAT when:
- You expect the VAT taxable turnover of the business to be more than £85,000 in the next 30 days
- Your business had VAT taxable turnover of over £85,000 over the last 12 months
If your business’ VAT taxable turnover is normally under the £85,000 VAT threshold and you do not wish to be registered, you can request an exception if it goes over the threshold temporarily.
What is ‘VAT taxable turnover’?
Your company’s VAT taxable turnover is the total value of everything you sell – including services – that is within the scope of UK VAT (and not exempt).
The VAT taxable turnover does not apply to a fixed period such as the tax year or the calendar year, but can be for any period. For example, you could look at the turnover from the start of September to the end of August the following year.
Once your company’s VAT taxable turnover exceeds £85,000 (the VAT threshold) in a period of 12 months, you must register your company for VAT.
How to register for VAT
You can register your company for VAT online, and if you have a contractor accountant they can help.
Another option is to appoint a contractor accountant, or even a high street accountant, to act as your agent. They can then submit your VAT returns to HMRC on your behalf. However, you’ll still need to get a VAT number and sign up for a VAT online account (using your Government Gateway ID). Find out how to create a Government Gateway account.
You can register by post using VAT registration form ‘VAT1’ if you meet HMRC’s criteria.
You can charge VAT on your services from the effective date of registration, providing that the place of supply is in the UK and there is no VAT exemption.
After registering for VAT either online or using form VAT1, you’ll receive a VAT registration certificate within 30 working days. It will be sent either to your VAT online account or to you (or your accountant) by post.
Sometimes there may be backlogs in issuing VAT certificates, however you must still start accounting for VAT from your registration date. Continue reading to find out your responsibilities of being VAT registered.
Responsibilities of being VAT registered
From your company’s date of VAT registration, you must do the following:
- Charge the right amount of VAT – currently this is 20%, but if this changes you need to be aware and ensure you are charging the correct amount. HMRC states that if you have not received your VAT registration number before you issue invoices, you should add 20% to the amount charged for the service. Then, reissue the invoices with the VAT-able amount once your VAT number is received. You will still need to account for and pay the VAT due to HMRC for this period.This is where VAT can be confusing, but don’t worry as your accountant can explain this all to you. If they assist you with invoicing for your company and completing VAT Returns, you’ll have even less hassle to deal with!
- Keep VAT records and a VAT account – from 1st April 2019 this will all be done online using MTD-compatible software. You can also access your company’s VAT information on your Government Gateway account
- Calculate and submit VAT returns (quarterly) – your contractor accountant can help you do this
- Pay your VAT bill to HMRC – you should do this promptly and ensure you have sufficient funds in your account to cover any VAT due. There are different deadlines if you use the Annual Accounting Scheme or payments on account. You must pay by the deadline which will be shown on your completed VAT Return.
VAT registration service
We assist all clients of our contractor accountancy services with limited company VAT registration.
You can get comfortable with your own limited company administration by registering for VAT yourself, but if you prefer the hands-off approach, you can appoint your accountant (i.e Churchill Knight) as an agent to do this for you.
Contact us for more information on VAT registration service and how you can register for VAT, either voluntarily or as a legal requirement.
What are the benefits of being VAT registered?
You also can reclaim VAT on certain expenses for your business as a contractor (for example on recharged expenses), providing you have a valid VAT receipt. Keep copies of all receipts that relate to business expenses for at least six years, and if you are reclaiming VAT on goods purchased then the goods must still be under the business ownership. You can claim back VAT on goods purchased up to four years prior to registration; for services, this time limit is six months.
VAT registration is something many of our clients choose to do. As contractors, it gives them a more professional and credible appearance. It is also very useful for claiming back VAT on business expenses.
A further benefit of registering a limited company for VAT is the ability to apply to join the VAT Flat Rate Scheme (FRS). This scheme allows you to fix the rate at which you pay VAT at a lower amount than what you charge. So you would charge 20% VAT on your services to your end client, but you would pay VAT at a lower fixed percentage of the gross amount charged to your client.
If the VAT Flat Rate Scheme suits your circumstances, it could allow you to further maximise your pay in combination with the major benefits of having a limited company. The FRS may be right for you if you are not a limited cost business, i.e. the goods you purchase for your business are either 2% of your turnover or £1,000 per year if over 2%.
With that said, it is important to note that VAT Flat Rate Scheme takes into account the reclaiming of VAT on expenses; therefore if you choose to be FRS registered you will not be able to reclaim VAT on any expenses with the exception of Capital Expenditure over £2000.
The VAT reverse charge
From October 2019, accounting for VAT will change for certain construction transactions. Instead of the supplier (the subcontractor aka limited company contractor) charging and accounting for VAT, it is the recipient (i.e. the agency or contractor/end-client) who receives the supply of service that accounts for the VAT.
Read more about the VAT reverse charge.
How we can help you
When you use Churchill Knight & Associates Ltd as your contractor accountant, you benefit from our extensive knowledge of tax and contractor market. Our dedicated team can provide advice and support on various matters from VAT to Personal Tax Returns and more. When using our service, you benefit from:
- Service from expert accountants with vast contractor accountancy expertise
- Payroll, bookkeeping, invoicing, back office support and administration
- In-depth knowledge of the contractor market
- Personal Tax – free advice on tax planning
- Assistance with the completion and submission of quarterly VAT Returns
- Liaising with HMRC
- Processed expenses and full administrative support
- Secure and mobile friendly Client Web Portal for submitting expenses claims and timesheets
If you are looking for a payroll service for your contractor career, then our service will provide you with a dedicated Account Manager who will help you complete all the necessary administration involved in operating a limited company.
Updated 22nd March, 2019.