VAT is a tax charged on most goods and services in the UK – the ‘standard’ rate is currently 20%.
When do you have to register?
If at any time, your business turnover for the previous 12 months exceeds the current VAT threshold level (currently £85,000 from 1st April 2023), 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 alone.
Your business turnover means the total sum invoiced by your company, not just the profit.
You can register even if your turnover doesn’t meet the threshold
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.
Different types of VAT schemes
Instead of accounting for VAT on the date you actually receive payment from clients/customers, you may opt to deal with Value Added Tax on a ‘cash accounting’ basis, i.e. you account for VAT only once you receive payment from your agency or client, rather than on the initial invoice date.
This can help with potential cashflow problems – you only have to repay HMRC for your company’s VAT liabilities when you have the physical money in your bank account.
You may also be better off by joining the Flat Rate VAT Scheme (FRS) instead of registering for the standard VAT regime.
The FRS was introduced to simplify VAT calculations for smaller businesses, although the ‘limited cost trader’ changes from April 2017 have made this scheme less attractive for most small companies which have low levels of expenditure.
You should always check with your accountant before deciding on the right VAT scheme to join.