VAT Registration Guide
This is a basic guide for all businesses, most contractors will also benefit reading our Guide to the Flat Rate VAT Scheme.
How and when should you register for VAT? Our easy to read guide has all the information you need, along with details about what forms to complete.
Basics of VAT
VAT is complicated, and the technicalities and jargon used by some accountants can make even the very clever minded slightly confused - so we've aimed to create a jargon free, ‘back to basics’ guide to VAT. Let’s start at the beginning…
What is VAT?
Essentially, if you are VAT registered you need to add 20% (2011 rate) on top of whatever you sell, to make things a little more complicated there are certain things that are zero rated like food, books, newspapers and magazines, young children's clothing and footwear - but let’s not worry about these for now as they are less likely to be an issue for contractors and freelancers.
When and why should I register?
Registration for VAT is compulsory when the annual turnover of your business, calculated to the end of any month, reaches a set amount – and this goes up slightly each year. That figure is £73,000, based on 2011 threshold. It is important that you keep a close eye on your turnover if you think it might be going to hit the threshold, as you have to register as soon as this happens. A common mistake is either to wait until the end of a calendar quarter, or worse, to wait until your annual income tax return!
You should also register if you expect that your turnover will exceed the threshold in the next 30 days – and this period can start at any time. This rule could affect you if a large contract is under discussion with a customer and, under this rule, registration is required immediately so that the large contract in question will be subject to VAT.
All the required VAT registrations forms are available on the HMRC website, but one thing to remember is that the VAT threshold amount can change, so make sure to check each year.
What happens if I don’t?
If you fail to register for VAT at the appropriate time you will be liable to a penalty – and this is calculated at 5%, 10% or 15%, depending on the delay between the date of hitting the threshold and the date which HMRC received registration notification. Up to 9 months delay incurs a penalty of 5% then up to 18 months is 10% and over 18 months is 15%. You should keep a copy of your registration notification as postal delays could affect the date on which HMRC receives it – as a penalty can be mitigated or cancelled in total if there are genuine circumstances which prevented you from submitting your application on time.
Can I register for VAT even if my turnover is lower?
Yes, and this can be a good idea – in fact, as many as 20% of all VAT registered businesses fall into this category. Registering and having a VAT number may help give your company the appearance of being larger than it is, and also when quoting for work, some companies insist that suppliers must be VAT registered. Many small businesses also do this so that they can claim VAT back on items purchased.
It is worth remembering though that being VAT registered may make you more expensive than your non-VAT registered competitors. For example, if you aren't VAT registered currently and you sell a product for £100, then this is all your customers will pay. If you then become VAT registered, you'll have to charge VAT on top, or soak up the difference yourself and reduce your profit margin. Before registering for VAT in this situation, it’s probably best to have a chat with an accountant.
If you want to register despite not reaching the threshold, you will need to satisfy HMRC that you are carrying on a business, or intending to carry on a business, and that you are making what is known as ‘taxable supplies’ – e.g. selling products or services for which VAT could be applied. Satisfactory evidence will need to be provided and a covering letter is also helpful, to pre-empt any questions that HMRC might to ask. The last thing to remember is that you do not have to be a limited company to register for VAT.
When do I start charging for VAT?
After registering, some people get slightly confused as to when they should start charging VAT, so just to be clear . . . you start charging on the day you register for VAT, not the day you receive your certificate - as it can take up to 30 days for this to arrive, and you don’t want to wait that long to start charging!
Whilst waiting for your VAT certificate, you will need to raise your invoices as a total figure, which includes the sale amount and the VAT amount. Then, once you have received confirmation of your VAT number you can add this to your invoices, separate the sale and VAT amounts, and re-issue to your customers - who will then be able to reclaim the VAT which you have charged.
What about VAT Returns?
Every quarter you must submit a VAT return to HMRC, and this can now be done online.
The return must show all your ‘output’ tax – e.g. the total VAT your company has charged your customers on products and services which you have provided. It must also include the VAT you wish to claim back against charges you have incurred on purchases for your company – for example supplies, equipment, stock and so on. This is known as ‘input’ tax.
The key thing to remember is that the VAT return must include all income invoices during that quarter, not income received – even if you do not get paid for 30 days or more afterwards. Once the VAT form is submitted, HMRC will then review it, and should your outputs exceed your inputs, you must then pay the difference to the Government. However, if your inputs exceed the outputs, your company is then entitled to a refund.
What are the benefits of being VAT registered?
- Being VAT registered means that you can reclaim the tax you have been charged when buying goods for your company. There are some goods and expenses which do not incur VAT – for example insurance, finance, credit, education, training and fund raising events – but on the majority of other goods and services you will be charged VAT.
- Being VAT registered adds more credibility to your business, making it appear larger than it is, as well as creating a more professional image.
- Some companies only deal with VAT registered suppliers, so this will give you more opportunities to deal with more suppliers.
What is the Flat Rate VAT Scheme?
The Flat Rate VAT scheme is an incentive provided by the government to help simplify VAT for small businesses, especially those who provide a service and therefore do not have large amounts of VAT to reclaim for business purchases. It is therefore the chosen scheme for most Contractors, Freelancers, Consultants and Interim Managers. One thing to note, if your annual turnover exceeds £230,000 per year then you are not eligible for the Flat Rate VAT scheme.
You charge VAT on your invoices at 20% (2011) but only pay back HMRC at a lower rate. This rate differs depending on your profession or trade and a table of business types and rates can be found here at the bottom of the page. These change every time VAT rates change so be sure to check – and remember that in your first year as a VAT registered company, when using the flat rate scheme, you receive an extra 1% discount for the year.
This difference in the rate you charge and the rate you pay provides additional income - for example, based on an IT contractor that pays 13.5% of the gross amount and 14.5% in subsequent years (you receive a 1% discount in your first year) and works for 45 weeks of the 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 - £2992.50 extra per year
£600 per day contract - £5130 extra per year
Companies on the Flat Rate scheme are unable to claim back any VAT on purchased goods and expenses for their business. You can however reclaim VAT on capital asset purchases over £2,000, for example a PC, providing all the capital purchases are on the same receipt – for example a PC, printer and scanner. You cannot however buy a PC one month for £1,500 then a printer the next month for £300 and a scanner the month after for £200 and add them together, they must all be on the same receipt.
The Flat Rate scheme still requires you to complete a quarterly VAT return form. You will need to charge the standard VAT rate on your invoices, but when you complete the form you calculate your VAT payable as 13.5% (using the example above) of the amount you have invoiced that quarter – including the VAT. So, for example, if you have invoiced £10,000 VAT in a quarter, you must calculate your payment as 13.5% of £12,000, not 13.5% of £10,000.
Even with having to calculate your VAT payment on your invoice amount plus VAT, the percentage you pay is still considerably lower than that of the standard VAT rate, so in effect you make a profit. However, you do them have to declare this profit as income and be taxed on it accordingly! The Government offers this option as the Flat Rate Scheme is simple for them to manage and you are in affect helping their tax collection process.
Flat Rate Scheme advantages
- Generate extra profit through paying less VAT that you charge
- A massively reduced amount of paperwork for you to handle
- An extra 1% reduction in your first VAT registered year
Flat Rate Scheme disadvantages
- If you buy lots of stock or other items for your business then you cannot claim the VAT back on these
The Cash Accounting Scheme
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 – but it cannot be used if your annual turnover is more than £1.35 million.
Each quarter you will be asked to fill in your VAT return form for HMRC stating your output tax and input tax in a very similar way to the standard VAT return. However, you cannot claim or reclaim VAT on purchases or services that have not yet been paid for. So even though an invoice was sent in March, if the payment was not received until June, then you would not include this piece of business in your end March tax return, but instead wait until your end June tax return.
Cash Accounting Scheme advantages
- 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.
Cash Accounting Scheme Disadvantages
- 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.
Make sure to discuss all your VAT scheme options with your accountant before deciding.
If you have any queries or would like further advice please do not hesitate to contact us on 0500 152500/ 01442 275789 or email: jaime.thorpe@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 11,000 clients.
We are the only National specialist firm of accountants with offices in all major UK cities so you’ll never be far from your accountant. SJD also have more qualified staff than any other firm in our market with qualifications from the following major tax and accountancy bodies - ATII, ATT, ACCA, CA, ACA, FCCA, ACMA. You’ll also be pleased to know that we are one of the lowest priced as well.
Free face-to-face meetings. This is another unique service, only SJD offers free face to face meetings - tax is complicated and sometimes only a meeting will do.
Unlimited access to your own dedicated accountant. No call centres, no outsourcing, no automated call handling. Simply telephone, e-mail or meet your own dedicated accountant face to face.
Money back service guarantee. All your telephone calls and e-mails will be answered the same day or we will refund your monthly fee's.
Outstanding reputation. We have won more awards for customer service and accountancy excellence than any other firm in our market.
All inclusive low cost monthly package which includes completion of accounts, payroll bureau, dividends and corporation tax computations, personal taxation, free bookkeeping software, unlimited access to your accountant and all company returns. All this for a fixed monthly fee of £110 plus VAT, which is one of the lowest prices in the market.
If you have any questions about contracting or would like any further advice please either contact your SJD Accountant or call our new client services helpdesk on 0500 152500 / 01442 275789 or email: nikki.hanlon@sjdaccountancy.com.
Appoint SJD Accountancy and never worry about your tax or accountancy affairs again!
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