VAT is a tax charged on most goods and services in the UK – the ‘standard’ rate is currently 20%.
If your business turnover exceeds the current VAT threshold level (currently £85,000 from 1st April 2017), then your company must register for VAT.
You should also register if you expect your turnover to exceed the threshold within the next 30 days.
Your business turnover means the total sum invoiced by your company, not just the profit.
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.
You may 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.
You may also be better off by joining the Flat Rate VAT Scheme instead of registering for the standard VAT regime.
You should always check with your contractor accountant before deciding upon the right VAT scheme to join.
- Try our overview of VAT for the basics on Value Added Tax, and more information on when to register for VAT.
- Guide to the Flat Rate VAT Scheme, which may be more beneficial to your company (check with your accountant).
- Summary of the main accounting methods for VAT
- For the latest thresholds (if this article has not been updated yet), visit GOV.UK.