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IT contractors - when should you register for VAT?

Published on Sep 3, 2008 |

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By law, limited company contractors should register for Value Added Tax if their annual turnover exceeds the current VAT registration threshold.

If you are billing in excess of £68,000 from 1st May 2009 (previously the threshold was £67,000), you should register your business for VAT. The threshold for registration is based on turnover, not profit.

Therefore, at the end of any given month, if the total value of your billed invoices reaches £68,000, you must register for VAT.

You should also register if you expect your turnover to exceed the threshold within the next 30 days.

You may also decide to register for VAT even if you don't expect to reach the threshold. Most contractors who run limited companies are registered for VAT. Not only does it give a professional impression to be VAT registered, but it will also enable you to reclaim any VAT you incur (such as computer equipment).

Umbrella company contractors don't need to concern themselves with VAT registration, as the umbrella company itself will be VAT registered and will deal with all VAT-related administration.

Many contractors opt to deal with Value Added Tax on a 'cash accounting' basis, i.e. they will deal with VAT only once they receive payment from their agency or client, rather than accounting for VAT on the invoice date.

Another option is to join the Flat Rate VAT Scheme which can simplify your VAT accounting - you can read more about this option here.

You can read more about the main VAT accounting methods you can use. If you're in any doubt, check with your accountant.