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Introduction
As a UK contractor, you may ask when should my business register for VAT in the UK? First of all, VAT stands for Value Added Tax which is the UK’s sales tax. When you’re registering for VAT, you could do this yourself or ask your accountant to complete your VAT registration (UK). What’s more, if you’re to go VAT registered as a UK contracting professional, you may ask how do I register a company for VAT? In this UK VAT registration guide, we’ll research when to register for VAT (self-employed contractor with their own company). We’ll also look into how VAT for self-employed contractors works when you’re running your own company. Furthermore, we’ll discover the UK VAT threshold (VAT limit) in terms of compulsory registration and look at voluntary registration. Therefore, in this guide, we’ll learn the entire process for contractor VAT registration in the United Kingdom.
If you’re running your own contracting company, hopefully it’s going well and your business is improving over time. However, does a limited company have to be VAT registered and what is a VAT registered company? Within this guide, we’ll look at the process of registering a company for VAT for self employed contractors, the UK VAT threshold, why should I be VAT registered.
In this guide, we’ll also look at what else to think about when you are registering for Value Added Tax. These are key thoughts whether you are a limited company contractor or small business owner. What’s more, we’ll take a look later on at small business VAT pros and cons and the main benefits of VAT registration (UK).
Initial thoughts on UK VAT registration
What to think about first on VAT for small businesses
When we look into VAT for small business and what to think about as part of becoming VAT registered, what should we consider? Basically, a main thought is VAT will be one of your main business taxes as a UK contractor limited company. Therefore, as part of the process of how to register my company for VAT, we’ll look at:
- When do I need to register for VAT (UK) in terms of the UK VAT limit.
- If I do register, how do I become VAT registered?
- How to register for VAT
- How long does the process of registration take?
- When my business is VAT registered, what does it mean?
- Once you register, when do contractors charge VAT?
Other first thoughts on HMRC VAT registration (UK)
As we mention earlier, VAT stands for Value Added Tax. This is the UK’s tax that businesses apply to the sale of goods or services that’re of a VATable nature. You can consider registering for VAT and apply for VAT number (UK) at the outset. In other words, you can do this after you set up your company for the first time. On the other hand, you can consider going VAT registered after being in business for a while. What’s more, you can apply to register when you’re in self-employment or when you run your own company.
Our UK VAT guide for contractors and small businesses shows how VAT works in more detail. Basically, this gives you a comprehensive insight into how the VAT system actually works for VAT registered companies and businesses. It also explains, what to consider once you get a VAT number and as a result are a VAT limited company.
What is the VAT threshold for small business?
Under HMRC’s rules, there’s an annual turnover limit before you need to register for VAT. Therefore, what is the VAT threshold for small business? A UK business must register if its annual VAT taxable sales or turnover exceeds the UK VAT registration threshold of £85,000. In addition, if your business is currently beneath the UK VAT reg threshold, it should keep an eye on its annual turnover on an ongoing basis. As a result, the business will have to VAT register and apply for VAT if it exceeds the small business VAT threshold (UK) at any time in the future.
A business’s VAT-taxable sales are the total of all goods it sells and the services it provides that are not VAT-exempt. Therefore, the total of such annual VAT-taxable sales is what it needs to keep an eye on, in case it needs to register for UK VAT in the future.
Common questions
When contractors and small business owners first start up, many have questions with regard to VAT and whether they need to register. Therefore, some of these questions include:
- Do you have to register for VAT?
- What is the VAT threshold?
- When do you need to register for VAT?
- Why register for VAT?
- How to register for VAT UK?
- What information do I need to register for VAT?
- How long does it take to get a VAT number in the UK?
- How to get VAT certificate?
In this guide, we’ll cover all of the above and look at how to register as a UK contractor or small business.
UK VAT registration guide -compulsory and voluntary registration
There are two potential scenarios where you may register your company for VAT. Therefore, when we look at HMRC VAT registration in UK, these are compulsory registration and voluntary registration for VAT.
1 Compulsory registration
A business will need to register for VAT, if:
- It expects its VAT-taxable sales to be more than the £85,000 VAT threshold in the next 30-day period.
- The business had taxable sales of more than £85,000 during the last 12 months -this means the value of what’d be VAT-applicable sales did go over £85,000 in the previous twelve months.
Other instances where you may register
A business might also need to register in some other cases. It depends on the kind of goods or services it sells and where it sells them. Certain sales of goods or services are not subject to VAT.
There’s also more complex rules when you sell goods or provide services abroad. This includes between the mainland UK and Northern Ireland since Brexit. You can find more information about this on the HMRC website.
If the business exceeds the UK VAT limit in the following 30-day period
When you consider should I be VAT registered, a business must register if it discovers that its total VAT taxable sales will be more than £85,000 in the next 30-day period. The business has to register by the end of those 30 days. Its effective VAT registration date is the day it discovers this, not the date its sales went over the VAT threshold.
If the business exceeded the VAT limit (UK) in the past 12 months
A business must register if, by the end of any month, its total VAT taxable sales for the last 12 months came to more than £85,000.
The business must register within 30 days of the end of the month, after which it exceeds the VAT threshold. Its effective VAT registration date is the first day of the second month after it exceeds the threshold.
Late VAT registration
If a business initially fails to register, once it realises this, it should register as soon as possible with a backdated VAT registration. As part of this process, the business will have to backdate the registration to the date it should’ve been registered. Therefore, when a business completes its VAT registration after the due date, it must pay what it owes, in terms of VAT, from the date it should’ve registered.
When a business is late in registering for VAT, it may also receive a penalty. The level of VAT penalty will depend on how much it owes and how late its registration is.
2 Voluntary registration
A business can register voluntarily if its business sales are below £85,000. Many limited company contractors and small businesses may decide to register voluntarily, even if they’re beneath the UK VAT limit. Indeed, there’s pros and cons and voluntary VAT registration benefits when you register, even if you do not need to. The main advantage when you’re registered is that the company can claim the VAT on their business expenses. What’s more, we’ll take a look at the other benefits of being a VAT limited company later.
Another thought when you contemplate registering business for VAT is your primary customer base. Basically, you’ll need to find out whether most of them are registered for VAT themselves. If they are, they can reclaim the VAT that your business will charge them. If they’re not, i.e., your customer base is primarily the public, rather than other businesses, registering for VAT (UK) will increase your prices by 20%. This’ll be a disadvantage unless you decide to absorb this extra cost yourself, which will cut into your profits.
When you’re registered, it gives your business more credibility in the eyes of certain recruitment sectors. Therefore, this is a good advantage for you if you register and it’s an important point for contractors.
UK VAT registration guide -how to apply for VAT
First thoughts
Let’s now look into how to register as a contractor for Value Added Tax. As part of the process of how do I register for VAT (limited company), you may ask how long does VAT registration take? As a limited company contractor, once you decide that your new business should or would like to apply for limited company VAT registration (UK), you’ve two choices. These are either online or through the post. Nowadays, most businesses and contractors register online as this is a much quicker process.
Register for VAT online
When we consider how to become VAT registered (UK), you can apply for VAT online. Most businesses choose this method and the HMRC website allows you to access the HMRC VAT registration service by registering for a HMRC Business Tax account with your email address.
When you start the online VAT registration process to register as a contractor, after you verify your email, you can choose a password for your new HMRC account. Shortly after doing this, you can choose `organisation’ if you’re registering as a company, or an `individual’ if you are self-employed. As part of registering as a contractor for VAT, you’ll be setting up a new HMRC Business Tax account. A few clicks later, you can choose the VAT option via their online digital service and follow the onscreen instructions for VAT registration online. However, many contractors and small businesses often let their accountant handle the UK VAT registration process as they’ll often provide VAT registration services to their clients.
How long will VAT registration take?
Once you submit the registration application, and if we consider how long does it take to register for VAT (UK), HMRC now post out VAT registration numbers for new registrations. Their online message says it could take up to 30 days to receive this. However, when it comes to VAT registration, how long does it take normally?
Usually, your new company VAT number comes through within 10 to 14 days. If there’s a delay and you are starting to wonder why is my VAT registration taking so long, in the case of most VAT registrations, you should wait a little longer as it’ll likely arrive around the timeline we quote above. Once you have your VAT number, you can access your VAT registration certificate via the VAT service on your HMRC Business Tax account.
Register through the post
To apply this way, you can complete the paper form VAT1 Application for Registration. Once you’ve done this, you can send it through the post to HM Revenue & Customs (HMRC). If you apply through the post on form VAT1, it usually takes a couple of weeks or more before HMRC respond. Once they process this, they’ll issue your VAT registration number (UK) if they accept your registration application. What’s more, they’ll send your VAT certificate (UK) (which contains your company VAT number) through the post to your business.
Other points to consider during the UK VAT registration application process
As part of your register limited company for VAT application, there’s various questions to answer, and these include the following:
Business activity
When you’re registering for VAT online you have to state your business activity(s). In the UK, a standard industrial classification code list exists, and you can use this to trace your business activity. If you’re unsure here, you can ask your accountant for help. Basically, some of the standard UK codes in use are:
- 62020 -Information technology consultancy activities -most IT consultants use this.
- 70229 -Management consultancy activities other than financial management.
- 71129 -Other engineering activities.
- 69102 -Solicitors (legal consultants).
- 70221 -Financial management consultancy services (except Corporate Tax).
- 74909 -Other professional, scientific and technical activities.
- 66190 -Independent financial advisor SIC code (not specialising in insurance or pensions advice).
- Further still, you can find the codes for other Engineering activities at 71121 to 71129.
VAT accounting schemes
As part of registering, the three main choices for accounting schemes are:
- VAT Flat Rate scheme -this was popular with UK contractors in the past. However, it isn’t so much nowadays, due to the limited cost trader rule. Therefore, most contractors choose not to register for this VAT sub-scheme and opt instead for the Standard VAT Scheme.
- Cash accounting scheme or invoice accounting scheme. The latter is for larger businesses and the invoice scheme means they declare and reclaim VAT to/from HMRC based on their invoice dates. Therefore, it’s better to choose cash accounting if you’re a small business. When you select this option, you’ll then declare and reclaim VAT to/from HMRC based on when your business receives and pays invoices.
- Annual accounting scheme. A business will usually file VAT returns with HMRC every three months. However, once you register, you can instead choose to file VAT returns on a monthly basis. As part of the registration process, HMRC asks if the company would like to join the annual accounting scheme. This means that you’ll pay over your VAT annually. As this will involve saving aside the VAT for 12 months, most contractors opt not to go for this. Therefore, most will complete and file their VAT returns on a three-monthly basis in future.
Contractor VAT registration (UK) -your business VAT registration number
Each VAT number (UK) is unique to every VAT registered business i.e., two businesses will never have the same VAT number.
Once your business is a VAT registered contractor company, it’ll receive its UK company VAT number. This is the number that your business will show on future sales invoices to customers or clients. You should also state your UK VAT number along with other company details in official correspondence, such as letters and the company website.
Operate VAT and keep contractor VAT records
Bank accounts
It’s a good idea to open two company bank accounts when you set up your company. The first is the Current account and the second can be a Savings account.
Going forward, you can transfer your company tax savings which include those for VAT in the Savings account. This will ensure that you keep them separate from the company’s normal funds. When taxes become payable, you can make a transfer back from the Savings account to the Current and then make the payment to HMRC.
Invoice your clients
Once UK VAT registration is in place, your company must charge VAT on its fees or sales to its customers. What’s more, when you start charging VAT on your invoices, this applies from the effective date of registration for VAT. Please note, the current standard rate of VAT in the UK is 20%.
It’s important to bear in mind that once your registered, you’ll need to know how to add VAT when you create your work invoices.
If you also plan to recharge expenses to your client, you must be aware of the correct process here.
Reclaim VAT on your expenses
Once you register and are set up to operate under the standard VAT scheme (rather than the VAT Flat Rate scheme), your business will be able to reclaim the input VAT. This is also known as input tax and you can reclaim the VAT it pays on invoices and receipts from standard-rated suppliers.
The UK standard VAT rate is 20% therefore most of your costs from suppliers who are registered themselves will include VAT at this rate. However, there’s some goods or services that have a lower rate of VAT such as gas and electricity at 5%. Furthermore, certain goods or services are exempt from VAT and these include:
- Insurance -this has its own insurance industry tax.
- Flights -this has its own aviation industry tax.
- Other `essentials’ such as rail fares, postages, certain foods, certain books and reading materials and bank charges.
UK VAT registration -Making Tax Digital and register business for MTD VAT
Being VAT registered means the business should keep VAT records as part of when it files future VAT returns. Nowadays, VAT-registered businesses must comply with Making Tax Digital (MTD) too. As part of this, a business will need to register for MTD VAT. Many contractors and small business owners will let their accountants handle the register for VAT MTD process. In addition, you can now file the actual VAT returns through MTD-compliant software.
Other areas to consider
An example of how to charge VAT under UK VAT registration
Below is a basic summary of how the details may look on a contractor VAT invoice:
| ABC Limited | 10 March 2023 | |
| 1 Wood Street | ||
| Alwood | ||
| Town | ||
| A12 3YZ | ||
| Professional services | 5 days @ £400 | 2,000.00 |
| VAT @ 20% | 400.00 | |
| Total | 2,400.00 |
File your VAT returns
Once your company’s registration is in place, and you’re set up for MTD, you have to submit your VAT returns to HMRC in the future. Basically, the VAT calculation in use which determines the amount of VAT which you pay or receive to/from HMRC is:
Output VAT on sales income.
Less
Input VAT on expenses income.
Equals
VAT due to or from HMRC.
Once you complete the boxes on the VAT return, box 5 will show the amount to be paid to HMRC or what’s due back from HMRC. Your company can pay HMRC the amount of VAT due. If a refund is due, HMRC will refund this to the business.
VAT returns usually cover three-month periods. What’s more, a business has one month and seven days in which to file the VAT return with HMRC. Therefore, for a VAT quarter that ends on 30 June, the filing due date and payment deadline is 7 August.
Registering for VAT pros and cons
When you register your business for VAT, what’s the benefits of registration? In addition, what does it mean to be VAT registered?
Pros
The main benefits of voluntary VAT registration, or even compulsory registration, is you can reclaim any VAT that you incur on your expenses from day-to-day. There’s two further benefits when your business is VAT registered, and these are:
- It’ll give your business extra credibility to the outside world.
- If you’re a contractor, certain organisations will only supply work to contractors who have a VAT registration.
Therefore, if you’ve your own UK VAT registration, this can often give you an advantage.
Cons
When you register, you’ll spend extra time when you keep and maintain your VAT records. However, if you have an accountant, they’ll usually help you with this process. Another thing to consider is when you’ve clients and customers who aren’t registered themselves, they’ll not be able to reclaim the VAT that you charge them. Therefore, your services or supplies will cost 20% more, which could in turn put you at a disadvantage to your competitors.
Final thoughts
This guide on business VAT registration (UK) gives you a good overview on whether you should register for VAT. We explain what it means to be registered and how the VAT system basically works. It’s key to remember that you should charge VAT from your effective date of registration. There’s also several benefits of being VAT registered, even if you don’t exceed the UK VAT threshold. Of course, if you register voluntarily, this also depend on your situation and who your customers will be. In the future, if you need to find VAT registration date, this’ll be on your VAT certificate (HMRC). What’s more, you can find your VAT certificate in your online VAT account with HMRC.
As a final note, it’s your choice whether you’d like to register voluntarily when you start your own business. If you do perform the UK VAT registration process yourself as a UK contractor, VAT will be one of your main contractor taxes.
Link to Contractor Advice UK group on
