Value Added Tax is a tax on most goods and services in the UK. If you’re setting up a limited company, chances are you will also register for VAT. Here is our guide to VAT: what it is, how to register, how to de-register, and how to avoid penalties.
Registering for VAT
Your company must register for Value Added Tax if your 12-month turnover is, or is expected to breach the current VAT registration threshold (this is £85,000 for the tax year beginning 1st April 2022 – same as the previous tax year).
In the unlikely event that you think your company will breach this threshold in the next 30 days alone (due to a very large incoming payment, for example), then you must also register right away.
In practice, accountants advise their contractor clients to become VAT registered regardless of their project, or current turnover, as there are many benefits to doing so.
For example, you will be able to reclaim the VAT on any business expenses you incur (e.g. buying a new PC), being VAT registered will make your company appear more professional, and if you join the Flat Rate VAT scheme (more on this later), you could actually pay less tax overall as a result.
Your accountant should take care of your VAT registration for you – this is one of the first tasks they will carry out when you set up a new company.
This can be done online on your behalf (by you or your accountant), or via the paper form VAT1.
Visit GOV.UK for more in-depth information on the setup process.
(If you’re an umbrella company contractor, you need not concern yourself with VAT, as your umbrella company will take care of all tax-related administration, so the information in this guide is aimed at limited company contractors).
How long will it take before I receive my company VAT number?
This is a very frequently asked question by new contractors. There is no guarantee of when you will receive your registration number.
In the past, new companies have had to wait over a month, even though HMRC currently advises that “you should get a VAT registration certificate within 14 working days, though it can take longer.”
You will receive your certificate online or by post, depending on how you registered.
Importantly, you must not charge VAT on your invoices to your agency/client until you have your VAT number but should increase your prices by 20% (the standard VAT rate) in the short-term, and then reissue the invoices with the correct breakdown between net service costs, and the VAT element.
Your agency/client will have encountered this on many occasions, so let them know if you need to invoice before you are VAT registered.
Different types of VAT schemes
HMRC operates several different VAT schemes to suit a multitude of businesses;
1. Standard VAT scheme
You invoice customers at the standard rate and repay VAT to HMRC based on the total amount of VAT you have charged on outstanding invoices, minus any VAT you have paid out via your business.
2. Cash Accounting scheme
The same as the above, except you only repay VAT to HMRC once you have actually received the funds from your customers and clients. You can only reclaim VAT on purchases when you have actually paid the supplier for them. This can be useful for cashflow purposes.
3. Flat Rate VAT scheme
A scheme which is often used by limited company contractors, it was designed to make accounting easier. You still invoice clients at the standard rate, but you pay HMRC a fixed percentage rate of your quarterly turnover, according to the industry you operate in. For IT contractors, the rate is 14.5%, and in the first year of operation, you can benefit from a 1% reduction to his fixed rate. Since April 2017, new ‘limited cost trader’ rules have removed the benefits of using the Flat Rate VAT scheme for many small companies, particularly those with low quarterly costs.
Your accountant will be able to advise you which scheme is most suitable for you. You can find out more about the various schemes on the HMRC site here.
Accounting for VAT
Once you are registered for VAT, you must include certain information on all your invoices to your agency or client. We have a dedicated article explaining which fields you must include, together with Word and Google Docs templates here.
These days, all ongoing VAT communication with HMRC is carried out online.
You (or more likely, your accountant) must submit your quarterly return within one month of your company’s quarterly end-date, and pay any VAT you owe by the same deadline.
If you set up a direct debit with HMRC, you will be allowed an extra week beyond the deadline before funds are automatically deducted from your business account. We recommend this method from our own experience.
VAT penalties for late filing an late payment (from Jan 2023)
The penalties for non-registration and late payment of VAT liabilities are fairly hefty, so you must make sure you (and your accountant) keep on top of your company’s tax accounting.
Late filing penalties
HMRC announced a new penalty point system for late filing, which applies to VAT return periods starting on 1st January 2023.
A penalty point will be applied for every late VAT return. And when you reach a certain number of points, you will be charged a £200 fine. For quarterly VAT returns, the penalty kicks in at 4 points. Your points can only be reset if you don’t ‘re-offend’ for a period of 12 months (for quarterly returns).
Late payment penalties
Alongside the late filing penalties, there are also fines for late payment of VAT:
- No fine for late payment of up to 15 days.
- 16-30 days – 2% penalty (during 2023, this will only apply for payments which are 30 or more days late).
- 31 days – 4% penalty if nothing has been paid, plus a daily penalty thereafter at 4% per annum.
Clearly, it is in your best interests to avoid these penalties, and the increased scrutiny HMRC may take into your accounts, so make sure you double-check that your accountant is processing your VAT returns on time, and consider setting up a direct debit so that you won’t ever miss a payment.
Why would your company de-register for VAT?
At some time in the future, you may have to de-register your company for VAT. This may be because you cease trading, or you may no longer wish to be registered. Here we explain how the de-registration process works.
There are two main reasons why a company would no longer be VAT-registered.
- The company ceases trading or joins a VAT Group.
- The company’s turnover is below the £83,000 de-registration threshold, and for whatever reason, its directors no longer wish to be VAT registered.
How do you de-register your company?
You can either do this online or submit form VAT 7 to HMRC.
The cancellation process takes around 3 weeks from either the date your company stopped trading, or from a date you specified on the de-registration form.
Once cancelled, you will be notified either online or via post.
You can no longer charge VAT on any invoices after the cancellation date.
Your accountant will need to submit a final VAT return covering the final period up until de-registration.
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