IT contractors and VAT – what it is, and how to register (2026 guide)

Value Added Tax is a tax on most goods and services in the UK. If you’re setting up a limited company, you’ll likely 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.

Scroll down to use our simple VAT calculator.

Register 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 (currently £90,000).

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 VAT on any business expenses you incur (e.g., buying a new PC), and being VAT registered will make your company appear more professional.

If you join the Flat Rate VAT scheme (more on this later), you could pay less tax overall as a result.

Your accountant can 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.

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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).

Simple VAT Calculator

The standard VAT rate on purchases is 20%. Use this simple calculator to add VAT to a net amount, or to remove the VAT element of a VAT-inclusive sum.

How long will it take for me to receive my company VAT number?

This is a very common question among 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. If you need to invoice before receiving it, you may agree on pricing on a VAT-inclusive basis and reissue invoices once your registration is confirmed.

Your agency/client will have encountered this many times, so let them know if you need to invoice before you are VAT registered.

Different VAT schemes

HMRC operates several different VAT schemes to suit all types 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 receive the funds from your customers.

You can only reclaim VAT on purchases when you pay 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 flat rate is typically 14.5%, although many contractors now fall under the ‘limited cost trader’ rules and must use a higher rate of 16.5%.

Limited cost trader rules are a blow to many contractors

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.

Unfortunately, most contractor companies fit into this category.

Your accountant can advise you which scheme is most suitable for your company. 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.

VAT returns must now be submitted using Making Tax Digital (MTD) compliant software, which most accountants will handle on your behalf.

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 and 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 penalty if VAT is paid or a payment plan is agreed upon within 15 days of the due date.
• 16–30 days late – a first penalty of 2% of the outstanding VAT at day 15.
• 31 days or more – an additional 2% of the outstanding VAT at day 30, plus daily interest charged thereafter.

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 current de-registration threshold (currently £88,000), 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.