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 qualifying business 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 VAT taxable turnover exceeds £90,000 in a rolling 12 month period.
There is also a separate rule if you expect your VAT taxable turnover to exceed £90,000 in the next 30 days alone.
Registration must normally take place within 30 days of the end of the month during which the rolling 12-month 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. You can check the latest rules on HMRC’s VAT registration page.
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.
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 associated businesses, where relevant
- 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 VAT invoices, your date of registration and when to submit your first VAT return.
Can I reclaim VAT back on company expenses?
This is a good question, and an important one to answer as you don’t want to miss out on what VAT you can and cannot reclaim for your business.
Firstly, this question naturally only applies to VAT registered businesses.
Once registered, there are lots of things that you can claim on, but you need to be clear about what is valid and what isn’t. In simplistic terms, you can only reclaim VAT on purchases made for your business where VAT has actually been charged and the normal VAT rules allow the claim.
These include:
- Computer equipment such as laptops, software, servers and maintenance used for work.
- Stationery, which covers things like printer ink, postage costs, paper and business cards.
- Stock, which, depending on your small business type, could be raw materials purchased to produce items, or items bought for resale.
- Commercial premises, including rent and utility bills where VAT has been charged.
- Professional services needed to run your business including financial and legal costs.
- Marketing which covers advertising of your business and other costs you utilise to promote it.
- Qualifying accommodation and subsistence costs incurred during business trips.
There are some restrictions. If you purchase goods and services for your small business but also use them in your personal life, you may only be able to reclaim the business proportion.
HMRC has more information on reclaiming VAT on business expenses.
Can I claim VAT on purchases made before VAT registration?
At the risk of stating the obvious, in order to claim back VAT on ANY purchases that you make, your business must be registered for VAT with HMRC.
Assuming that you have done that, let’s look at what you can claim and how far you can go back with your claims.
If you have only just registered for VAT and previously made business related purchases you can still reclaim VAT on them if you bought them within the previous 4 years for goods (as long as you still have the goods, or they were used to make other goods that you still have) or within the previous 6 months for services.
This VAT must be reclaimed on a VAT return and if you are including purchases made before your VAT registration date, then they should normally be included on the first VAT return that you complete.
You’ll need to have proof in the form of valid VAT invoices or receipts.
Keeping hold of VAT receipts is going to make life easier for you in the long run though so do try and be organised and hold onto them. If you use bookkeeping software such as FreeAgent, receipts can be uploaded as you go rather than having to hunt for them later.
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 generally can’t claim back the VAT on purchases, although there is an exception for certain qualifying capital purchases costing £2,000 or more including VAT.
The Flat Rate Scheme used to be particularly popular with contractors and freelancers, but the limited cost business rules mean it is now much less beneficial for many service businesses. We’ve covered this in more detail in our Flat Rate VAT Scheme guide.
How do VAT returns work?
Most VAT registered businesses submit a VAT return every three months.
The return shows the VAT you’ve charged your customers, the VAT you’re entitled to reclaim on your purchases and the balance due to HMRC – or due back to you.
VAT records generally need to be kept digitally under Making Tax Digital, and most small businesses now deal with this through accounting software such as FreeAgent or Xero.
You can read more about VAT record keeping and Making Tax Digital on GOV.UK.
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 where the VAT is recoverable.
- 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 certain goods bought up to four years before registration and services bought up to six months before registration, providing the conditions are met and you have the evidence.
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.
You can also read our guide to de-registering for VAT if your circumstances have changed, or get in touch with the Integro team if you need help with registration or your VAT returns.
