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Introduction –VAT registration (UK)
As a UK contractor, you may ask when should my business register for VAT? If you need to register as a UK contracting professional, you may ask how do I register for VAT? In this UK VAT registration guide, we will look at how to get VAT registered and what does VAT registered mean. We will also consider the VAT threshold in terms of compulsory registration and we will also look at voluntary registration. What’s more, we will investigate the entire process for small business or contractor VAT registration in the United Kingdom.
If you run your own contracting company, it is hopefully going well, and your business is improving over time. However, does a limited company have to be VAT registered? Within this guide, we will look at the UK VAT threshold, why should I be VAT registered and how to go about registering for VAT when you are a limited company contractor or a small business owner.
Initial thoughts
What to think about first
As a UK contractor limited company, VAT may be one of your contractor taxes. Therefore, as part of the process of how to register my company for VAT, we will look at:
- When do I need to register for VAT (UK) in terms of the UK VAT threshold.
- If I do register, how do I become VAT registered?
- How to register for VAT voluntarily.
- When my business is VAT registered, what does it mean?
Other initial thoughts on VAT registration (UK)
VAT stands for Value Added Tax. This is the UK’s tax that businesses apply to the sale of goods or services:
- That are of a VATable nature; and
- Are provided by a VAT-registered business.
You can consider registering for VAT when you set up your company for the first time. Alternatively, you can consider going VAT registered when you have been in business for a while. Being contractor VAT registered could be when you are in self-employment or you run your own company.
Our VAT guide covers VAT in more detail. This gives you a comprehensive insight into how VAT works.
What is the VAT threshold for small business?
Under HMRC’s rules, there is an annual 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 turnover exceeds the VAT registration threshold of £85,000. The business will also need to register if it knows it will exceed the small business VAT threshold 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.
UK VAT registration guide -compulsory and voluntary registration
There are two scenarios where you may register when we look at VAT registration in UK, and these are 1) compulsory registration and 2) voluntary registration.
1 Compulsory registration
A business will need to register for VAT, if:
- It expects its VAT-taxable sales to be more than the VAT threshold of £85,000 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 would be VAT-applicable sales reached £85,000 in the previous twelve months.
Other registration instances
A business might also need to register in some other cases. It will depend on the kinds of goods or services it sells and where it sells them. Certain sales of goods or services are not subject to VAT.
There are 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 VAT threshold 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 registration date is the day it discovers this, not the date its sales exceeded the threshold.
If the business exceeded the VAT threshold 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 threshold. Its effective registration date is the first day of the second month after it exceeds the threshold.
Late UK VAT registration
When initially failing to register, once a business realises this, it has to register as soon as possible. As part of registering, the business has to backdate the registration to the date it should have been registered for VAT. 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 have registered.
When a business is late in registering for VAT, it may also receive a penalty. The level of 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 on voluntary VAT registration, even if they are beneath the VAT threshold. There are pros and cons when you register even if you do not need to. The main advantage is that the company can reclaim the VAT on their business expenses.
Another consideration as part of this is your primary customer base and whether they are VAT registered themselves. If they are, they can reclaim the VAT that your business charges them. If they are not, i.e., your customer base is primarily the public, as opposed to other businesses, registering for VAT will increase your prices by 20%. This will be a disadvantage unless you decide to absorb this extra cost yourself, which will cut into your profits.
There is another important point to consider for contractors. When you do register for VAT, it will give your business more credibility in the eyes of certain recruitment sectors. Therefore, this is a good advantage for you, if you register.
UK VAT registration guide -how to register for VAT (UK)
Let us now consider how to register for VAT (UK). When we apply for this, how long does VAT registration take? As a limited company contractor, once you decide that your new business needs to or would like to apply for company VAT registration (UK), you have two choices:
Register for VAT online
You can apply for VAT online (most businesses choose this method), and the HMRC website allows you to register with your email address. After verifying your email, you will then be able to choose a password for your account. Shortly after doing this, you can choose `organisation’ if you are registering as a company, or an `individual’ if you are self-employed. As part of this, you will 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 to register.
A contractor or small business often lets their accountant handle the VAT registration process. However, this is the process to follow if you do this yourself. Once the registration application is submitted, it usually takes two working days until you receive a message from HMRC. This will usually contain your new VAT registration number. Your HMRC account will be fully set up a further two days after you receive the initial communication. At this point, you will have access to your VAT certificate. However, in more recent times when it comes to how long does it take to register for VAT, it seems HMRC are now posting out VAT registration numbers for new registrations. Their online message says it could take up to 30 days to receive this. In practice this does seem to come through within 10 to 14 days.
Register through the post
You can complete the form VAT1 Application for Registration. Once you complete this, you can send it through the post to HM Revenue & Customs (HMRC). If you apply through the post on form VAT1, it will usually take a couple of weeks or more before HMRC respond. Once they process this, they will issue your VAT registration number if they accept your registration application. As part of this, they will send your VAT certificate which contains your VAT number through the post to your business.
Additional considerations during the registration process
As part of the registration application, there are various questions to answer, and these include the following:
Business activity
In the UK, a standard industrial classification code list exists, and you can use this to trace your business activity. If you are unsure here, you can ask your accountant for help. Some of the standard UK codes in use are:
- 62020 -Information technology consultancy activities -used by most IT consultants.
- 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
The three main choices here are:
- VAT Flat Rate scheme -this was popular with UK contractors in the past. However, it is not 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. Therefore, this means they declare and reclaim VAT to/from HMRC based on their invoice dates. It is better to choose cash accounting if you are a small business. When you select this option, you will 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 alternatively choose to file VAT returns on a monthly basis. When registering for VAT, HMRC asks if the company would like to join the annual accounting scheme. This means that you would pay over any VAT annually. As this will involve saving aside the VAT for 12 months, most contractors opt not to go for this. Therefore, they will complete and file their VAT returns on a three-monthly basis in future.
Contractor VAT registration (UK) -your 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 VAT registered, it will receive its 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 is a good idea to open two company bank accounts when you set up your company. The first will be 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 they are kept 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 you are registered for VAT
The business must charge VAT on its fees or sales to its customers once VAT registration is in place. When you come to charge VAT on your invoices, this applies from the date of your registration for VAT. The current standard rate of VAT is 20%.
It is important to bear in mind that once VAT registration is in place, you will need to know how to add VAT when you create your work invoices.
If you are also going 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 (as opposed to 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 VAT registered suppliers will include VAT at this rate. However, there are 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 (taxed via the insurance industry).
- Flights (taxed via the aviation industry).
- 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
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). As part of this, a business will need to register the business for MTD VAT. Many contractors and small business owners will let their accountants handle this process. In addition, the actual VAT returns also now need filing through MTD-compliant software.
Other considerations
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 VAT registered is in place, and you are set up for MTD, you need to file the VAT returns in the future. The VAT payable to or receivable from HMRC is based on:
Output VAT on sales income.
Less
Input VAT on expenses income.
Once you complete the boxes on the VAT return, box 5 will show the amount to be paid to HMRC or what is 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 cover three-month periods. A business has one month and seven days 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 are the benefits of VAT registration? In addition, what does it mean to be VAT registered?
Pros
The main benefits of voluntary VAT registration, or even compulsory registration, is that you can reclaim any VAT that you incur on your expenses from day-to-day. A further benefit is, when you are VAT registered, it will give extra credibility to the outside world. If you are a contractor, certain organisations will only supply work to VAT-registered contractors therefore when you register this can give you an advantage.
Cons
When you register, you will spend extra time keeping and maintaining VAT records. However, if you have an accountant, they will usually help you with this process. Another thing to consider is when you have clients and customers who are not VAT registered themselves, they will 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 VAT registration (UK) will give you a good overview when you consider whether you should register for VAT. There are several benefits to registering, even if you are not required to do so. Of course, this will depend on your situation. Once registered, if in the future you are looking to find VAT registration date it will show this on your VAT certificate which you can find in your online VAT account with HMRC.
Finally, it is your choice whether you would like to register voluntarily when you start your own business. If you do register as a UK contractor, VAT will be one of your main contractor taxes.
Link to Contractor Advice UK group on
