If you’re a limited company contractor whose turnover exceeds the upper tax threshold of £85,000, then you’ll need to register your company for VAT. In the UK, VAT or ‘value added tax’ is currently added to most products and services sold in the UK at a rate of 20%. Even if you’re company’s turnover falls below the threshold, there are still some advantages to registering for VAT. The upper tax threshold is also the point at which you need to register for the government’s new digital tax scheme. In this article, Contracting Wise looks at the pros and cons of registering your limited company for VAT, and takes a quick glance over the government’s new digital tax scheme.
Pros of registering your Limited Company for VAT
- large companies who are also VAT registered will be able to reclaim the VAT paid over to your business
- Make your business more professionally appealing
- Reclaim the VAT on your business expenses (Standard Rate scheme)
- Register for the Flat Rate scheme to reduce administration
Cons of registering your Limited Company for VAT
- Clients who aren’t VAT registered can’t offset the 20% VAT that you will add to your invoices – this may be a problem if you deal primarily with small business clients
- You must complete and file a quarterly VAT return otherwise there will be a penalty from HMRC
- Keeping track of cash flow to ensure you have adequate funds to meet your VAT liability
Standard rate Vs flat rate?
When you register for VAT, you have two choices of schemes:
- Standard Rate: This involves administering VAT on every eligible item you buy or sell. VAT at the standard rate applies to most goods and services. However, some have reduced rates or are exempt, such as financial and property transactions.
- Flat Rate: Is open to businesses with an expected annual turnover of less than £150,000 and aims to simplify the VAT system for freelancers, contractors, and small businesses. As it takes into account the reclaiming of VAT on expenses; you won’t be able to offset VAT on any expenses with the exception of Capital Expenditure over £2000.
When deciding if you should register for VAT and which scheme you should choose, you need to consider your turnover, the type of clients you have, and the type of business expenses you commonly incur. An accountant will give you invaluable advice on the course of action to take.
You can access further information here.
How long does it take to receive a VAT registration certificate?
Once you have registered for VAT, either online or using the paper form VAT1, HMRC states that you can expect to receive your VAT registration certificate, which contains your VAT number, within one month of the date of submission.
Making Tax digital (MTD)
Making Tax Digital for VAT is the government’s scheme to improve tax administration, making it:
- more effective
- more efficient
- easier for businesses to get their tax right
From April 2019, most VAT-registered businesses will be obliged to file their VAT returns using Making Tax Digital (MTD)-compatible software.
In July 2018, HMRC released a communication pack that included details of a pilot scheme for around half a million users whose tax affairs were up-to-date and straightforward. From 1st April 2019, HMRC’s online VAT portal will close and businesses who meet the threshold criteria will be required to register for digital VAT submission. The exception to this will be a small minority of VAT-registered businesses with more complex requirements, whose joining of the scheme will be deferred. In order to ensure that the transition to a digital system deal with any problems as they occur, the planned digitisation of other taxes will not be mandatory until at least April 2020.