VAT is complicated. The technicalities and jargon used by some accountants can make even the longest-standing contractors slightly confused, so we’ve aimed to create a jargon-free, back to basics guide to value-added tax.

Firstly, what is VAT? 

Value Added Tax (more simply known as VAT) is a consumption tax which is added to the cost of goods depending on their value. If you are VAT registered, you need to add 20% 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 I wouldn’t worry about these for now. 

When do I have to register for VAT?   

You have to register for VAT if, in the previous 12 months, your turnover has reached the VAT threshold amount of £85,000 or you expect it to reach £85,000 in the next 30 days. All the required VAT registrations forms are available on HMRC’s website, but one thing to remember is that the VAT threshold amount can change, so make sure to check each year to make sure you are in or out VAT registration.

However, even if your turnover doesn’t meet the threshold for the year, you can still register for VAT voluntarily at any point.

Can you be VAT registered and not have a limited company?

Yes, some businesses feel that having a VAT number adds certain credibility and prestige to their company. 

Should I register for VAT even if my turnover won’t hit the threshold? 

Some contractors choose to register for VAT even if their annual turnover doesn’t meet the threshold. Registering and having a VAT number may help give your company the appearance of being larger than it is. Also when quoting for work some companies mandate that suppliers must be limited and be VAT registered.

However, this may make you less competitive for example: if you aren’t VAT registered currently and 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 and will have to charge £120.00 or soak up the difference yourself and reduce your profit margin.

Before registering for VAT, it’s probably best to have a chat with an accountant (who will invariably quote you a price plus VAT).

I’ve registered for VAT: now what?

The day you register with HMRC for VAT is the day you must start charging VAT on all your goods and services i.e. whatever you sell. The VAT rate is currently 20%.

After registering, some people get slightly confused as to when they should start charging VAT. It is the day you register for VAT that you start charging interest and not the day you receive your certificate, as this can take up to 30 days (and you don’t want to wait this long to start charging VAT).

Whilst waiting on your VAT certificate, within this time you will need to raise your invoices as a total figure including the sale amount and the VAT amount. Once you have received confirmation of your VAT number you can add this to your invoices and separate the sale and VAT amounts and re-issue to your customers. Your customers will then be able to reclaim the VAT which you have charged.

Every quarter you must then submit a VAT return to HMRC (this can now only be done online). This must show all your output tax-this is the total VAT your company has charged your customers on products and services which you have provided.

You also include the VAT charges you have incurred on purchases for your company such as supplies, equipment, stock (this is known as input tax). One of the main advantages of registering for VAT is that some of the VAT cost you are charged when buying goods to run your company can be noted in your quarterly VAT return report and possibly reclaimed, i.e. you may get a VAT refund. This is not true for all VAT scheme visit our Flat Rate VAT Scheme Guide for more information. 

Once the form is submitted HMRC will then review your VAT form and should your outputs exceed 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.

Are there advantages to VAT registration? 

Being VAT registered has many advantages for contractors, including:

  • Being VAT registered means you can reclaim the input tax you have been charged when buying goods for your company. There are some goods and expenses which you will incur where you have not been charged VAT. There is no VAT on insurance, finance, credit, education, training and fundraising events, the majority of other goods you will be charged VAT. 
  • Being VAT registered adds more credibility to your business, making it appear larger than it possibly is. 
  • Some companies only deal with VAT registered companies – this will give your company more opportunities to deal with more suppliers. 
  • Customers and clients that are VAT registered can reclaim the VAT you charge them. Again it creates a more professional image and the customer may then be more inclined to use you again in the near future knowing you are both VAT-registered and that they can possibly reclaim their input tax also. 

How can an accountant help you? 

VAT is one of the most complex and onerous tax regimes imposed on business and many businesses inadvertently overpay or underpay VAT.

The ever-widening scope of VAT, the constant stream of detailed changes to the regulations, and the ever-growing demands of Customs and Excise call for a trained professional eye to ensure that you do not fall foul of the regulations and do not pay the Exchequer more than you need to. We provide an efficient cost-effective VAT service, which includes:

  • Assistance with VAT registration 
  • Advice on VAT planning and administration 
  • Use of the most appropriate scheme 
  • VAT control and reconciliation 
  • Help with completing VAT returns
  • Planning to minimise future problems with Customs and Excise 
  • Negotiating with Customs and Excise in disputes and representing you at VAT tribunals 
  • Making Tax Digital-compliant software