VAT Guide for Limited Company Contractors

Limited Company Contractors maximise contract retention not only through taking Dividends & reclaiming Business Expenses but also through using the Value Added Tax (VAT) system.

As a Limited Company Contractor if you register for VAT you may be able to;

  • Reclaim input VAT on purchases (you normally pay 20% on VATable items which you are unable to reclaim unless you are VAT registered), AND
  • Improve cash flow (for small companies, VAT payments are normally paid quarterly so you will build up cash over the quarter), AND
  • Improve the credibility of the business

To discuss opening a Contractor Limited Company call Commonwealth Contractors now on 0800 294 4388 or Submit your Details and we will get right back to you!

Charging VAT on Invoice

As an IT Contractor once you have registered for VAT you MUST;

  • Charge 20% Output VAT on all Consultancy Invoices, AND
  • Retain adequate VAT provisions in your company bank account, AND
  • Make payments to the HM Revenue & Customs quarterly (without delay)

If you’re a £500 per day Contractor and you have just worked 20 days in a month you will need to raise an invoice which breaks down the payment as follows;

  • 20 Days IT Consultancy X £500 per day = £10,000
  • Plus 20% VAT on Consultancy Services = £2,000
  • Total Invoice Value Including VAT = £12,000

VAT Accounting Methods

There are two primary VAT Accounting Methods for IT Consultants operating a Contractor Limited Company;

Accounting Method

 Details

Standard VAT Accounting (based on invoices issued / received)

With standard VAT Accounting you must keep accurate records relating to Output VAT invoiced to clients and Input VAT on the invoices you receive from your suppliers. At the end of each quarter you then need to pay the difference to HMRC.This is the scheme that will apply to you by default

Cash Accounting (based on cash received/paid)

For most contractors going via an agency, the agency will pay relatively promptly (in 7-28 days), but if you are dealing directly with an End-User, they may pay you on 45 day terms, or even later.

The cash accounting scheme allows you to pay VAT only on the money you have received, so that you don’t have to pay out VAT before you receive it.

Cash accounting is not a default option, it has to be applied for. It is designed for small companies, so an applying company must be turning over less than £1.35m pa. Once registered on the scheme, a company can stay on it until their turnover reaches £1.6m. It is safe to say that these thresholds do not usually present any issues for contractors with personal service companies. They apply in 2015 and have not changed since we started in 2011.

Registering for VAT

It’s not compulsory to register for VAT unless your turnover of VAT taxable goods and services is going to exceed £81,000 per year, however many accountants will register a Contractor Limited Company for VAT in order to maximise retention from day 1.

If you would like to apply for VAT registration you should either;

  • Contact the VAT Helpline on 0300 200 3700,

OR

Find out More

To find out more about Commonwealth Contractors call now on 0800 294 4388 or Submit your Details and we will get right back to you!

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