Whether you’ve only recently set up a company, are still thinking about it, or even if you‘ve been in business for a while, you may still be unclear when it comes to VAT. Here we’ll strip down to the basics, what it is, the benefits of VAT for contractors and the various schemes available.

What is VAT?

Value Added Tax – commonly referred to as VAT – is the purchase tax that is applied to almost all goods and services in the UK. It is an indirect tax that businesses claim on behalf of the government i.e. companies charge VAT on goods and services and that VAT is paid to HMRC.

If your business is VAT registered, you can claim VAT on all expenditure. The standard VAT rate in the UK is 20%.

You’ll simply need to keep receipts for any purchases you want to reclaim VAT on. Receipts show VAT as a separate value to the cost of purchase so you don’t need to work it out which makes things very straightforward.

When do I need to register for VAT?

You can choose to register for VAT simply because it suits your business, for example if you sell to other VAT registered businesses and want to reclaim the VAT. However, legally you MUST register if your business turnover exceeds £90,000 in a 12 month period (this threshold had increased as announced in the Spring Budget 2024, from £85,000 previously).

Registration must take place within 30 days of the end of the month during which the threshold was exceeded. It’s important to regularly check your turnover so you’ll be aware immediately if you reach that threshold.

It’s worth noting here that the threshold can change so it’s worth checking now and then so you’re always aware of the current figure.

Does VAT apply to Sole traders or Limited Company Contractors?

Both sole traders and limited company contractors can be VAT registered – either through choice or if they reach the £90,000 threshold.

How do I register for VAT?

Your accountant can set up your VAT registration for you. Alternatively, the required VAT registration forms are available on HMRC’s website. You can also register by filling in a VAT1 form and returning it to HMRC in the post.

If you are doing it yourself there are a few things that you’ll need:

• Your National Insurance number
• Your company’s certificate of incorporation
• Details of all associated business within the last 2 years
• Details of your business bank account
• Records of sale if you’ve bought the business

Once completed, either by yourself or your accountant, you’ll receive a unique VAT number which you will need to put on all your invoices and company paperwork, your date of registration and when to submit your first VAT return. You’ll receive your certificate within 30 days.

What type of ‘VAT scheme’ would benefit me as a Contractor?

There are several types of VAT schemes available:

• The ‘Standard VAT Scheme’ where VAT is calculated at the current rate of 20% on both income and outgoings. Even if you have not paid for goods purchased, you can still reclaim the VAT in your quarterly return which is great for your cash flow. However, likewise, you’ll have to pay VAT to HMRC for goods or services you may not have been paid for yet which can be difficult for a new business in terms of cash flow.
• The ‘Cash Accounting Scheme’ where you only account for VAT once you have received payment for your invoices. This is very similar to the standard scheme but can provide extra cash flow benefits to small businesses. Just bear in mind that you won’t be able to reclaim VAT on purchases until you have actually paid for them.
• The ‘Flat Rate VAT Scheme’ which was created to simplify VAT for small businesses. Rather than accounting for every individual transaction you simply apply a flat rate VAT percentage to your turnover. With this scheme you can’t claim back the VAT on purchases but you are allowed to account for one single large purchase (over £2,000) or a number of purchases totaling over £2,000 if bought in the same transaction. What’s more, you’ll receive a 1% discount on the flat rate in your first year of trading.

This simplified scheme is chosen for most contractors and freelancers.  As the VAT percentage that you pay is lower than that of the standard VAT rate, you can keep the difference as profit. The percentage varies dependent on the services you provide. The full list of which can be found here: Flat Rates for Type of Business.

Why do people voluntarily register for VAT?

There’s a number of benefits to your business being VAT registered:

• You can reclaim VAT on your expenses i.e. most goods and services purchased from other businesses
• It may work to your advantage by making your business look more credible in the eyes of large companies, putting you on an equal footing. This can be appealing to customers, lenders, investors and suppliers.
• You can reclaim VAT on goods backdated up to four years prior to your company’s registration on business expenses (providing you have evidence). These can only be applied to your businesses first VAT return.

If you think registering your company for VAT would be beneficial to your business or need further advice on registering for VAT, talk it through with your accountant who can guide you further. Alternatively call 0207 096 2659 or email christian@integroaccounting.com where one of our full qualified accountants can help you further.