UK VAT registration -sShould I register for VAT

Share This Guide, Choose Your Platform!

Introduction 

As a UK contractor forming your own company, you may ask when my business should register for VAT in the UK. When you start your own business, this is an initial thought, and the question of when to register for VAT (self-employed contractor with a company) will depend on your future trading income. VAT stands for Value Added Tax and is the UK’s sales tax. If you want to go VAT registered as a UK contracting professional, you may ask how I register a company for VAT. Indeed, if you are registering for VAT, you can do it yourself or ask your accountant to complete your VAT registration (UK). This UK VAT registration guide will examine how VAT for self-employed contractors works for those who are a contractor company or sole trader. Furthermore, we’ll discover the UK VAT threshold (VAT limit) regarding compulsory registration and look at voluntary registration.

If you’re running your own contracting company, it’s hopefully 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? This guide will look at registering a company for VAT for self-employed contractors, the UK VAT threshold and why I should be VAT registered. We’ll also consider what else to consider when registering for Value Added Tax. This will include how to get VAT registered and what being VAT registered means. Whether you’re a limited company contractor or a small business owner, these are key thoughts. What’s more, we’ll look later at small business VAT pros and cons and the main benefits of VAT registration (UK). Therefore, in this guide, we’ll learn the entire process for contractor VAT registration in the United Kingdom.

Initial thoughts on UK VAT registration 

First thoughts on VAT for small businesses

When we investigate VAT for small businesses and what to think about as part of becoming VAT registered, what should we consider? Basically, VAT is 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) regarding 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?

More first thoughts on HMRC VAT registration (UK) 

As we mentioned earlier, VAT stands for Value Added Tax. This is the UK’s tax, which businesses apply to the sale of goods or services that are of a vatable nature. You can consider registering for VAT and applying for a 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. Therefore, you should consider whether you must register if you’re self-employed or run your own company.

Our UK VAT guide for contractors and small businesses shows how VAT works in more detail. It gives you a comprehensive insight into how the VAT system works for VAT registered companies and businesses. It also explains what to consider once you get a VAT number and, as a result, become a VAT-limited company.

What is the VAT threshold for small businesses?

Under HMRC’s rules, there’s an annual turnover limit before you must register for VAT. Therefore, what is the VAT threshold for small businesses? A UK business must register if its annual VAT taxable sales or turnover exceeds the UK VAT registration threshold of £90,000. 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 has 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 which aren’t VAT-exempt. Therefore, it must keep an eye on the total of such annual VAT-taxable sales in case it must register for UK VAT in the future.

Common questions

When contractors and small business owners first start up, many have questions about VAT and whether they should 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 a VAT certificate?

In this guide, we’ll cover all the above and look at how to register as a UK contractor or small business.

UK VAT registration guide -compulsory & voluntary registration 

When you’re in business, you may ask if I should register for VAT. Basically, there are two potential scenarios where you should or can register your company for VAT. Therefore, when we research HMRC VAT registration in the UK, we see that these are compulsory and voluntary registration for VAT. 

1 Compulsory registration

A business will need to register for VAT if:

  • It expects its taxable turnover to be more than the £90,000 VAT threshold in the next 30-day period.
  • The business had a VAT taxable turnover of more than £90,000 during the last 12 months -this means the value of what would be VAT-applicable sales went over the £90,000 threshold in the previous twelve months.

Other instances where you may register 

A business might have to register in some other cases. It depends on the kind of goods or services and where it sells them. Certain sales of goods or services are not subject to VAT.

There are also more complex rules when selling goods or providing services abroad. This has included the relationship 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 considering whether I should be VAT registered, a business must register if it discovers its total VAT taxable sales will be more than £90,000 in the next 30-day period. The business must register by the end of those 30 days. Its effective VAT registration date is the day it discovers this, not the date its sales exceeded 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 totalled more than £90,000.

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 must 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 £90,000. Many limited company contractors and small businesses may register voluntarily, even beneath the UK VAT limit. Indeed, there are pros and cons and voluntary VAT registration benefits when you register, even if you don’t have to. When registered, the main advantage is that the company can claim the VAT on its business expenses. Moreover, we’ll look at the other benefits of being a VAT-limited company later.

Another consideration when contemplating registering a business for VAT is your primary customer base. You should find out whether most of them are registered for VAT themselves. If they are, they can reclaim the VAT 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 will be a disadvantage unless you decide to absorb this extra cost, which will cut into your profits.

When you register, your business will have more credibility in the eyes of certain recruitment sectors. Therefore, registering is a good advantage for you, and it’s an important point for contractors.

UK VAT registration guide -how to apply for VAT 

First thoughts 

Let’s now look at how to register as a contractor for Value Added Tax. As part of how I register for VAT (limited company), you may ask how long VAT registration takes. As a limited company contractor, once you decide 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 it’s much quicker.

Register for VAT online

When we consider how to become VAT registered (UK), you can apply for VAT online. Most businesses choose to register online, and the HMRC website allows you to access the HMRC VAT registration service by registering for an HMRC Business Tax account with your email address.

When you start the online VAT registration process to register as a contractor, you can choose a password for your new HMRC account after you verify your email. Shortly after, you can select `organisation’ if you’re registering as a company or an `individual’ if you’re 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 accountants handle the UK VAT registration process as they usually provide VAT registration services to their clients.

How long will VAT registration take?

Once you submit the registration application, you will ask how long it takes to register for VAT (UK). HMRC send VAT registration numbers for new registrations through the post. Their online message says receiving this could take up to 40 days. However, how long does VAT registration take?

Usually, your new company VAT number comes through within 10 to 14 days. If there’s a delay, you may start to wonder why my VAT registration is 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 receive your VAT number, you can access your VAT registration certificate via the VAT service on your HMRC Business Tax account. It’s worth noting VAT numbers are unique, and all VAT-registered businesses have their own number.

Register through the post

You can complete the VAT1 Application for Registration paper form to apply this way. 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 responds. Once they process this, they’ll issue your VAT registration number (UK) if they accept your application. Moreover, they’ll send your VAT certificate (UK) (containing your company VAT number) to your business through the post.

What other aspects are there during the UK VAT registration application process?

As part of your register limited company for VAT application, there are various questions to answer, and these include the following:

Business activity 

When registering for VAT online, you must 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, 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 popular nowadays due to the limited-cost trader rule. Therefore, most contractors choose not to register for the FRS VAT sub-scheme and opt 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 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 opt to file VAT returns monthly. As part of the registration process, HMRC asks if the company would like to join the annual accounting scheme. This means you’ll pay over your VAT annually. Most contractors opt not to do this as this will involve saving aside the VAT for 12 months. 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, and 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 number will appear on future sales invoices to customers or clients. You should state your UK VAT number and other company details in official correspondence, such as letters and the company website. 

How can you operate VAT & keep contractor VAT records? 

Bank accounts 

When you set up your company, it’s a good idea to open two company bank accounts. The first is a Current account, and the second can be a Savings account.

In the future, you can transfer your company tax savings, including those for VAT, to the Savings account. This will ensure you keep them separate from the company’s regular funds. When taxes become payable, you can transfer them back from the Savings account to the Current account and then pay 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 that the current standard VAT rate in the UK is 20%.

It’s important to note that once registered, you should know how to add VAT when creating work invoices.

If you plan to recharge expenses to your client, you must know the correct process here.

How to reclaim VAT on expenses? 

Once you register and are set up to operate under the standard VAT scheme (rather than the VAT Flat Rate scheme), your business can reclaim the input VAT. This is known as input tax, and you can reclaim the VAT it pays on invoices and receipts from standard-rated suppliers. You should obtain a receipt or invoice from the supplier when reclaiming VAT.

The UK standard VAT rate is 20%; therefore, most of your costs from registered suppliers will include VAT at this rate. However, some goods or services have a lower VAT rate, 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’ include rail fares, postages, certain foods, certain books and reading materials and bank charges.

UK VAT registration -Making Tax Digital & register business for MTD VAT

Being VAT registered means the business should keep VAT records as part of when it files future VAT returns. VAT-registered businesses must also comply with Making Tax Digital (MTD). As part of this, a business must 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.

What are the other areas to consider? 

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 must submit your VAT returns to HMRC in the future. The VAT calculation in use, which determines the amount of VAT which you pay or receive to/from HMRC, is:

Output VAT -this is the VAT paid to your business by your customers or clients.

Less

Input VAT -this is the VAT paid by your company on expenses and purchases.

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 VAT due. If a refund is due, HMRC will refund this to the business.

VAT returns usually cover three-month periods. A business has one month and seven days to file the VAT return with HMRC. Therefore, the filing due date and payment deadline for a VAT quarter ending on 30 June are 7 August.

Registering for VAT pros and cons 

What are the benefits of registration when you register your business for VAT? In addition, what does it mean to be VAT registered?

Pros

The main benefit of voluntary VAT registration, or even compulsory registration, is you can reclaim any VAT you incur on your expenses from day to day. There are 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 keeping and maintaining your VAT records. However, if you have an accountant, they’ll usually help you with this process. Another thing to consider is that clients and customers who aren’t registered will be unable to reclaim the VAT 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 of whether you should register for VAT. We explain what it means to be registered and how the VAT system works. It’s key to remember you should charge VAT from your effective date of registration. There are also several benefits of being VAT registered, even if you don’t exceed the UK VAT threshold. Of course, if you register voluntarily, this depends on your situation and who your future customers will be. In the future, if you want to find your VAT registration date, that’ll be on your VAT certificate (HMRC). Moreover, you can find your VAT certificate in your online VAT account with HMRC.

Finally, you can register voluntarily when you start your own business. If you perform the UK VAT registration process as a UK contractor, VAT is one of your main contractor taxes.

Link to Contractor Advice UK group on

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: April 6th, 2024 / Categories: Company Taxes, First timer guide /

Share This Guide, Choose Your Platform!

Leave A Comment