At JSA we are often asked by contractors operating through their own limited company whether or not they need register for VAT. In this blog we’ll look at the basics of VAT, next week, in Part 2, we’ll examine the various schemes open to contractors who decide they do wish to register their business for VAT.
A company is not obliged to register for VAT until its VAT taxable turnover for the previous 12 months reaches £81,000. This figure is known as the VAT threshold. The threshold changes, usually once a year in the Budget, so you should regularly check your turnover against the prevailing threshold. It is also possible for a company with a turnover of less than the threshold to register voluntarily, and for some contractors there is good reason to do so.
If you are a VAT registered business then you have to add VAT at the appropriate rate to all your invoices (usually 20%). This VAT on your sales, known as output VAT, isn’t yours to keep – it must be handed over to HMRC. However, when you make purchases from other UK business, who are also VAT registered, your business will be charged VAT. The VAT you incur on purchases is known as input VAT and your business can claim this VAT and offset it against the output VAT it has raised on invoices to customers and clients. It the surplus of output over input VAT that you pay over to HMRC, or reclaim from HMRC if the input VAT is greater than your output VAT.
By registering for VAT, your business will be able to claim the input VAT on your business expenditure, which hitherto you will have written off. You will, in effect reduce the cost of your vatable business expenses by 1/6th (20/120).
Additionally, being VAT registered is often seen by clients as a sign that a business is sizeable and established, as after all, the turnover threshold is £81,000.
A VAT registered business has to submit VAT returns and ensure that any VAT owing to HMRC is paid on time, every time. This should be a price worth paying if by being VAT registered your business can reduce its costs by up to 1/6th.
However, you should consider the VAT status of your own clients and customers. If they are VAT registered, then they too will be able to claim any VAT you charge them, but if they’re not then the VAT you charge them becomes a hard cost to them, potentially a hard cost 20% higher than it otherwise would be.
If the majority of your turnover is from sales to businesses that are registered for VAT then you should probably register.
If you sell mainly to business that are not registered for VAT, then you should probably not register.
If your turnover exceeds £81k in a twelve month period, you’ve no choice, you have to register for VAT.
Please note that there are other considerations you need to make should you have customers outside the UK, or if the products or services you supply are zero-rated or VAT-exempt. If that’s the case then don’t hesitate to seek professional advice.
Here at JSA our Limited Company Service team advise hundreds of contractors every week. Should you have any questions, please don’t hesitate to contact us on 0800 25 26 40.