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Registering your Limited Company for VAT & Making Tax Digital

Registering your Limited Company for VAT & Making Tax Digital

For contractors operating through their own limited company whose turnover exceeds the upper tax threshold, registering for VAT is a legal requirement. The upper tax threshold is also the point at which you need to register for the government’s new digital tax scheme that has been introduced to make the VAT system more efficient. If your company’s turnover falls below the upper tax threshold, there may still be advantages to registering your limited company for VAT. In this article, Contracting Scout gives contractors a simple breakdown of their VAT options.

What is VAT?

VAT stands for Value Added Tax, which is currently set at 20% in the UK. This tax is added to most products and services sold in the UK, although some products are zero-rated or exempt, such as newspapers, books and protective clothing.

A limited company contractor must register for VAT when their VAT taxable turnover is more than £85,000 in a 12-month period. You can register your limited company for VAT at any point if you expect your turnover to reach the £85,000 threshold.

If your limited company turnover will not reach this amount, you can voluntarily register your limited company for VAT if it benefits you to do so.

What are the benefits of voluntarily registering my Limited Company for VAT?

  • You can reclaim the VAT on your business expenses (if you are on the Standard Rate scheme)
  • You can register for a reduced Flat Rate of VAT to reduce the administration involved in preparing your quarterly VAT return (Flat Rate scheme)
  • If your clients are large companies who are also VAT registered they will be able to reclaim the VAT paid over to your business
  • It may make your business more professionally appealing to clients

What are the disadvantages of voluntarily registering my Limited Company for VAT?

  • If your client isn’t VAT registered then they can’t reclaim the 20% VAT that you will add to your invoices. This might affect you if your client base is smaller businesses.
  • If you register your company for VAT you will be required to complete and file a quarterly VAT return. If you fail to complete the return then there will be a penalty from HMRC.
  • When you’re VAT registered, it can be more difficult to keep track of your cash flow and profit. You may benefit from accountancy services.

Standard rate or flat rate?

When you register for VAT, you have two choices of schemes.The first, Standard Rate, involves reclaiming VAT on every eligible item you buy or sell. The second, Flat Rate, is open to businesses with an expected annual turnover of less than £150,000 and aims to simplify the VAT system for freelancers, contractors, and small businesses.

On the Flat Rate scheme, you pay HMRC a fixed rate based on your business sector. First, you add the Standard VAT rate of 20% to your sales invoice amount, then you collect the full amount from your client. Next, apply your sector percentage to this (gross) amount, which is then paid over to HMRC via a VAT return. The difference between the two rates is retained by your limited company as income.

It’s important to note that VAT Flat Rate Scheme takes into account the reclaiming of VAT on expenses; therefore you will not be able to reclaim VAT on any expenses with the exception of Capital Expenditure over £2000.

When deciding whether to register and on what scheme, you need to look at your turnover, the type of clients you have, and the expenses you incur that you can claim VAT on.

Registering for VAT is usually done online and you canaccess further information here.

What is Making Tax digital (MTD)?

From 1st April 2019, the vast majority of VAT-registered businesses with a taxable turnover above the VAT threshold of £85,000 will be obliged to keep digital VAT records and send returns using Making Tax Digital (MTD)-compatible software. Around 40% of all VAT registered businesses are registered voluntarily; as their turnover is below the VAT threshold, these businesses are not within the scope of MTD. In July 2018 HMRC released a ‘Making Tax Digital for Business Stakeholder Communication Pack’ which included details of a pilot scheme for around half a million users whose tax affairs were up to date and straightforward.  In the same month, a study by the Institute of Chartered Accountants in England and Wales (ICAEW) indicated low awareness of MTD, with just over 51% of all UK VAT businesses having heard of the scheme. An estimated one million businesses will need to register by next April. For those affected, the main point are summarised below.

  • HMRC’s online VAT portal will close from April 2019
  • VAT returns must instead be submitted to HMRC through MTD software
  • Businesses must digitally record their VAT transactions and returns using MTD software

 

At Contracting Scout, we offer free support and guidance for contractors. To talk to a member of our team call 0203 603 1878

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