VAT Guide for Contractors

What is VAT?

Valued Added Tax (VAT) is a tax on consumer expenditure. It is applied to most business transactions that involve a transfer of goods and services.

Once registered for VAT a company charges VAT on sales invoices (Output VAT) and pays VAT on company purchases (Input VAT). Each quarter the difference between Output VAT and Input VAT is paid to or reclaimed from the HM Revenue and Customs when completing a VAT Return.

There are three rates of VAT; the standard rate of 17.5%, the reduced rate of 5% and the zero rate. Most VAT registered businesses including computer consultancies apply the standard rate of VAT (17.5%) to sales invoices.

VAT Registration Advantages

There are four main benefits to VAT Registration:

1. Input VAT can be reclaimed on company purchases
2. The companies cash flow position improves
3. Bank Interest may be earned on VAT provisions
4. Business credibility with Clients, Agencies and even the HM Revenue and Customs improves

If you plan to go into business with a limited company you should consider registering for VAT immediately. Although not compulsory to register at this stage most contractors find that it’s possible to recover input VAT on start up expenses such as computer costs, website design and hosting, accountancy fees, business insurance etc

VAT Registration Disadvantages

The big disadvantage of VAT Registration is more paperwork. Once registered you’re required to keep detailed VAT records and complete quarterly Returns whether or not the company has been active in the period.

If business administration doesn’t appeal to you it may be a good idea to consider using an umbrella company solution rather than a limited company. With an umbrella company everything is done for you. There’s no need to register for VAT, keep suitable records or take responsibility for quarterly VAT Returns as the umbrella company takes care of the lot. To find out more about Commonwealth Contractors umbrella company solutions such as Expat Advantage and Payroll Umbrella call now on 0800 294 4388 or submit your details and we will get right back to you.

VAT Registration

It’s not compulsory to register for VAT unless:

• Your company has supplied taxable goods and services that total more than £67k in the last 12 months
• It’s expected you will supply taxable goods and services valued at more than £67k in the next 30 days alone

Businesses with turnovers below VAT Registration limits can still sign up by undertaking a voluntary registration. The best way to register is to call the National Advice Service on 0845 010 9000.

Once registered the HM Revenue and Customs will send out a VAT Registration Certificate (normally takes around 20 days). The certificate includes details of the companies Registration Number and VAT Periods. A copy should be scanned and sent to clients and agents when agreeing future contracts.

From the moment the company is registered VAT must be charged on sales invoices (at a rate of 17.5% for computer consultancy). Records of all VATable Sales and Purchases should be kept.

VAT Accounting

Although there are a number of VAT Accounting methods the only ones really relevant to Limited Company contractors are the Cash Accounting Scheme and the VAT Flat Rate Scheme.

VAT Cash Accounting Scheme

The cash accounting scheme is mainly beneficial to those contractors who face long delays between raising an invoice and getting paid. This is seldom the case for those dealing via recruitment agents, but those dealing directly with end users can have contractual payment terms of 45+ days (and actual payment may be weeks late!).
With Cash Accounting VAT is only payable to the HM Revenue and Customs once actually received from a client. The scheme is limited to companies turning over under £300,000pa; this is not usually a constraint for a 1 person consulting company.

The VAT Flat Rate Scheme

With the VAT Flat Rate Scheme the company pays a fixed rate of VAT based on revenue rather than working out the difference between Input VAT and Output VAT. Contractors with low levels of Input VAT actually benefit financially from the scheme.

The VAT Flat Rate Scheme is limited to companies turning over under £150,000 pa (net of VAT)

To find out more about going into business with a Limited Company call Commonwealth Contractors now on 0800 294 4388 or submit your details and we will get right back to you.

Related Contractor Ltd Companies Pages:

• Contractor Limited Companies
• • Contractor Limited Companies
  • IR35 Assessment Tool
• Managed Service Companies
• • Managed Service Companies
  • MSC Involvement
• UK Dividends
• • Freelance Contractors and UK Dividends
  • Calculating and Paying Dividends
  • Dividend Tax
• Income Tax and National Insurance
• • Setting a Salary
  • Registering for PAYE
  • Income Tax and National Insurance
  • PAYE Payments and Returns
  • PAYE Investigation
• Business Expenses
• • Claiming Business Expenses
  • Contractor Expenses
  • Home Based Rules and Business Expenses
  • IR35 and 5% Expense Rule
  • Site Based Rules and Business Expenses
• VAT Guide
• • VAT Guide for Contractors
  • The VAT Flat Rate Scheme
• Timesheets, Invoices and Payments
• • Contractor Timesheets
  • Limited Company Invoices
  • Client and Agency Payments
• Section 660 and Income Shifting
• • Section 660a and Income Shifting
  • Section 660a Background
• Dealing with Contracts Inside and Outside IR35
• UK Corporation Tax
• Directors Duties and Responsibilities
• Opening a Limited Company Bank Account
• Loans and Mortgages
• Contractor Limited Companies and UK Immigration