One frequently asked question comes from several contractors asking our team about VAT registration. One of the questions noted was:
“Should I register my limited company for VAT? What are the benefits of being VAT registered, and what are the implications for my limited company accounting and administration?”
Let's begin with what VAT registration is.
VAT stands for Value Added Tax, which is currently set at a rate of 20% in the UK. This tax is added to most products sold in the UK, excluding some products that are zero-rated such as newspapers, magazines and books.
In terms of your limited company, if it is VAT registered, you will need to add VAT to invoices that you raise; you will add VAT if the place of supply is in the UK and the services provided are not exempt from VAT. In addition to adding VAT to your service invoice, you can also claim back the VAT on your business expenses that are VAT applicable and for which you have a VAT receipt.
When you should register your limited company for VAT:
A business, or in your case your limited company, must register for VAT when VAT taxable turnover is more than £82,000 in a 12-month period. You can register your limited company for VAT at any point during your limited company set up if you expect your turn over to reach the £82,000 threshold.
If your limited company turnover will not reach this amount, you can still voluntarily register your limited company for VAT if it suits you financially to do so.
If you are unsure about VAT registration and prefer to wait, you can do so and later apply to be VAT registered should you reach the £82,000 threshold. If you choose this option, you can charge VAT from the effective date of registration providing that the place of supply is in the UK and that the services provided are not exempt from VAT.
You also can claim back VAT on business expenses, providing you have a VAT receipt. You should keep copies of all receipts that relate to business expenses for a period of up to seven 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.
From your date of 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
- Keep VAT records and a VAT account
- Calculate and submit VAT returns
- Pay any VAT due to HM Revenue & Customs (HMRC); you should do this promptly and ensure you have sufficient funds in your account to cover any VAT due
When you apply for your limited company to be VAT registered, you must wait until you receive your VAT number before you start charging VAT or showing any VAT on your invoices. However, it is pertinent to note that you will need to pay VAT to HMRC for this period while you wait for your VAT number.
VAT registration is something many of our clients choose to do. As contractors, it gives them a more professional appearance and shows the limited company as having a high turnover. It is also very useful for claiming back VAT.
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. Joining the VAT Flat Rate Scheme allows you to further maximise your pay in combination with the major benefits of having a limited company.
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.
How we can help you:
When you use Churchill Knight & Associates Ltd as your contractor accountant, you benefit from our extensive knowledge of the contractor market and business and tax knowledge. Our dedicated team can provide advice and support on various matters from VAT to Personal Tax Returns and more. You benefit from the following when you use our service:
- Expert accountants with vast expertise
- Payroll, bookkeeping, invoicing, back office support and administration
- In-depth knowledge of the contractor market
- Personal Tax – free advice
- Quarterly VAT returns
- Liaising with HMRC
- Processed expenses and full administrative support
- Secure and efficient 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 team who will help you complete all the necessary administration involved in operating a limited company.
Call our team on 01707 871622 for more information, or use the request a callback button below and we will gladly call you back at a time to suit you.
You can also find out more about our limited company service by using the buttons below.
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