VAT Guide

You may also find our Flat Rate VAT Scheme Guide helpful - this is the scheme most Limited Company - Contractors, Freelancers, Interim Managers and Consultants use.

VAT Guide - Standard VAT Accounting

Being VAT registered means you can reclaim VAT on purchases that you have been charged VAT on. Using the standard VAT accounting method means that every quarter you would be required to fill in a standard VAT return form (online only). This must include:

  • All output tax – this is the VAT which you have charged to customers/clients on your invoices in the relevant quarter. Whether you have or have not received payment for the goods/services provided, you still must add this to your VAT return form in that quarter.
  • All input tax – this is the VAT which you have been charged by suppliers on goods or expenses your business has incurred during the relevant quarter. Again whether or not you have paid for the goods or expenses you must add this to your VAT return form in that quarter.

Using this method means that you would ask to reclaim VAT based on the date of your raised invoice rather than the date the invoice is paid for. For example - if you were completing a VAT return form for the first quarter ending March:

Date invoice raised              Date invoice paid              Date to file and pay your VAT
11th March                             12th June                            March (first quarter)

You must include the invoice in the quarter the invoice was raised not the month the payment was received.

Remember...

  • You do not have to register for VAT until you reach the £81,000 (2014 tax year) threshold within a 12 month period of your business starting – once this amount is reached it is mandatory to be VAT registered.
  • Some companies voluntarily register for VAT – this could be for many different reasons; customers will only do business with VAT registered companies or you may be looking to purchase many goods where VAT is chargeable and can be reclaimed.
  • Standard VAT is currently 20% (2014 rate).

Advantages of using Standard VAT Accounting
Even If you have not paid for goods purchased, you can still reclaim the VAT from HM Revenue and Customs in the quarterly VAT return, great for your cash flow.

Disadvantages of using Standard VAT Accounting
You have to pay VAT over to HMRC for service or goods sold which you may have not yet received the money for, not great for cash flow especially for new businesses.

These are our recommended and most commonly used VAT schemes.

VAT Guide - Flat Rate Scheme

The flat rate VAT scheme is an incentive provided by the government to help simplify taxes and means you charge VAT on your invoices at 20% (2014) but only pay back HM Revenue and Customs at a lower rate, for IT Contractors (rates differ depending on your profession/trade) the rate in your first year is just 13.5% of the gross amount and 14.5% in subsequent years (you receive a 1% discount in your first year).

This provides the following additional income (based on a 45 week working year):

  • £200 per day contract - £1,710 extra per year
  • £350 per day contract - £2,992.50 extra per year
  • £600 per day contract - £5,130 extra per year

The FRS is the chosen scheme for most Contractors, Freelancers, Consultants and Interim Managers. It is also the scheme that is recommended for businesses that have very few VAT chargeable purchases and expenses i.e. don’t buy much stock. 

The VAT percentage you pay is considerably lower than that of the standard VAT rate, (visit our Flat Rate VAT Scheme Guide page for a full list of the standard rates depending on your profession) you than keep the difference as your profit. See example below based on a Limited Company specialising in IT:

Net amount you invoice your client  £5,000
VAT charged on top to your client (20%)  £1,000
Gross Amount    £6,000
Flat rate VAT 13.5% (this includes a first year discount of 1%)  13.5%
VAT to be paid to HMRC - 13.5% of £6,000  £810
VAT received from client    £1,000
Profit for you i.e. what you get to keep     £190

However, there are certain thresholds which cannot be exceeded, for more information see our detailed Flat Rate VAT Scheme Guide.

And finally….The Cash Accounting Scheme
This scheme cannot be used if your annual turnover is more than £1.35 million. The cash accounting scheme is best suited for businesses who do not wish to pay VAT until their customers or clients have paid for their goods or services. Likewise with goods (like stock) bought for their own company, they cannot ask to reclaim VAT if they themselves have not paid for the goods.

Each quarter you will be asked to fill in your VAT return form for HMRC (online only) stating your output tax and input tax (very similar to that of the standard VAT), however you cannot claim or reclaim VAT on purchases or services that have not yet been paid for. 

Here is an example if you were completing a VAT return form for the first quarter ending March:

Date invoice raised                Date invoice paid                 Date to file and pay your VAT
11th March                               12th June                               June (Second quarter)

Even though the invoice was supplied in March, and technically is in the first quarter cut off, the payment was not received until June, meaning you would not claim back VAT on this invoice until the second quarter. The payment must be received before adding this to your quarterly VAT form.

Advantages of using the Cash Accounting Scheme

  • Benefits the cash flow of the business as you will only be required to pay VAT to HMRC once you have received payment from your customers.

Disadvantages of using the Cash Accounting Scheme

  • You will not be able to reclaim VAT on any goods purchased until you have actually paid for them.
  • If you decide to leave the Cash Accounting scheme, any outstanding VAT will need to be paid to HMRC before you leave the scheme, so make sure to discuss all your VAT scheme options with your accountant before deciding.

We hope this VAT Guide has given you a clear idea as to which scheme will work best for your business. For more information on VAT visit the following pages:

Any further questions you may have contact us on 0500 152500/ 01442 275789 or email: nikki.hanlon@sjdaccountancy.com

SJD Accountancy

SJD Accountancy are the UK's largest specialist provider of fixed fee, Limited company accountancy services to contractors; we've been acting for contractors across the UK since 1992 and have more than 15,000 clients.

We are the only national specialist firm of contractor accountants with offices nationwide. SJD Accountancy has more qualified staff than any other firm in our market with qualifications from the following major tax and accountancy bodies - ATT, AAT, CTA, ACCA, CA, ACA and FCCA.

  • Unlimited face to face meetings. This is a unique service only SJD Accountancy offers - unlimited face to face meetings across the UK - tax is complicated and sometimes only a meeting will do.
  • UK's Largest contractor accountants with more qualified staff. No call centres, no outsourcing, no automated call handling. Simply telephone, email or meet your own dedicated accountant* face to face.
  • Money back service guarantee. All your telephone calls and emails will be answered the same day or we will make a full refund of that months fee.
  • Outstanding reputation. We have won more awards for customer service and accountancy excellence than any other firm in our market, including: Best Accountant for Contractors, Accountant of the Year and Best Professional Service Team to name just a few.
  • All inclusive low cost fixed fee accountancy package which includes completion of accounts*, payroll bureau, dividends and corporation tax computations, personal taxation, free bookkeeping software, your own dedicated accountant* and all company returns for a fixed fee of £120 plus VAT per month.

If you have any questions about contracting or would like any further advice please call our new client services helpdesk on 01442 275789 or email: janice@sjdaccountancy.com.

Appoint SJD Accountancy and never worry about your tax or accountancy affairs again.

Form your own Limited company with SJD - our same day online company formation service includes company bank account set up, VAT/PAYE registration and advice on optimum share structure. 

You may also find the following pages, guides and case studies useful:

*If you would like us to complete your company year end accounts we simply ask that you have been a client of SJD for one year or have made 12 monthly payments. All accountants are part or fully qualified.