Does VAT make your head spin? We’ve put together a basic guide on everything you need to know about VAT as a contractor in the UK.
What is VAT?
Let’s start with the basics. VAT, or value added tax, is a tax levied on the consumption of goods and services, ultimately paid by the final consumer.
There are certain items that are zero-rated, including food, books, newspapers and young children’s clothing, but these generally aren’t applicable to contractors and freelancers.
If your limited company is VAT-registered as a contractor you need to add 20% to the value goods or services you provide to customers, and issue invoices which will serve as the official records to tax purposes.
When should you register?
It is compulsory to register for VAT when the turnover of your business reaches, or you expect it to reach, the relevant threshold – calculated per a 12 month rolling period. The current threshold is £83,000.
By way of example, as at the end of August 2016, you have to look backwards from that month for 12 months stretching back to September 2015, and if the total turnover or sales amount for those 12 months is more than £83,000, it is time to get registered for VAT.
It can be a painful set of consequences if your business has been trading for a few years and have inadvertently gone over the VAT threshold. HMRC is entitled to apply VAT retrospectively to the point where it reached the threshold and the additional amounts demanded can run into tens of thousands of pounds for a contractor or small business.
What happens if you don’t register?
You’ll be penalised 5%, 10% or 15%, depending on how soon after hitting the threshold you register with HMRC.
- A delay of up to 9 months = a 5% penalty
- A delay of up to 18 months = a 10% penalty
- A delay of over 18 months = a 15% penalty
Can you register for VAT if your turnover is lower?
While it is not necessary, it could still be a good idea.
When quoting for work, you’ll find that some companies insist that suppliers are VAT-registered. While registration might be advantageous, keep in mind that this will likely make your services more expensive than non-registered competitors and could affect your profit margin.
Some small businesses also register for VAT in order to claim VAT back on items purchased.
When do I start charging VAT?
If you have registered for VAT, you should begin charging on the day you registered. There is no need to wait until you receive your certificate, as this could take up to 30 days.
For any invoices issued between your date of registration and the date you receive your certificate, you will need to raise invoices as a total figure; this includes the sale amount and the VAT amount. Once you have received your certificate and VAT number, you can add this to your invoices, re-issuing them to customers, separating the sale and VAT amounts.
What about VAT Returns?
You’ll need to submit a VAT Return to HMRC every quarter, which needs to show your “output” tax – i.e. the total VAT you have charged your customers, as well as any VAT you wish to claim back against charges you’ve incurred for the company.