As a contractor, when should my business register for VAT? In this UK VAT registration guide, we will look at the process that is involved in small business or contractor VAT registration.
If you run your own business, it is hopefully going well, and your business is improving over time. In this guide, we will look at the process of registering for VAT when you are a limited company contractor or a small business owner. In terms of business structure, this could be with a company or self-employment.
As a contractor, VAT may be one of your contractor taxes therefore, we will look at:
- When you are required to register for VAT.
- Would like to register for VAT voluntarily?
UK VAT registration guide -initial thoughts
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 this when you have been in business for a while. This 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 are required 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 also needs 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, 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 £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 needs 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.
When initially failing to register, once a business realises this, it will need to register as soon as possible. As part of registering, the business will need to backdate the registration to the date it should have been registered for VAT. It must also 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 also register voluntarily if its business sales are below £85,000.
Many contractors and small businesses may decide on voluntary VAT registration, even if they are beneath the VAT threshold. There are pros and cons when registering 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. They can reclaim the VAT that your business charges them if they are. 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 are registered 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 -the process when registering for VAT
As a limited company contractor, once you decide that your new business needs to or would like to apply for VAT registration, you have two choices:
- 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 an organisation if you are a company or self-employed, 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.
Key to note, 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.
- You can complete the form VAT1 Application for Registration. Once completed, you can send this 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. They will send your VAT registration number if they accept your registration application. They will also send your VAT certificate 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:
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 main choices here are:
- VAT Flat Rate scheme -this was popular with 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. 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 usually files VAT returns with HMRC every three months. However, once registered, you can alternatively choose to file VAT returns monthly. 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.
UK VAT registration -your VAT registration number
UK VAT numbers are unique to each VAT registered business i.e., two businesses will 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 VAT number along with other company details in official correspondence, such as letters and the company website.
Operating VAT and keeping VAT records
It is a good idea to open two company bank accounts when you set up your company. The first should be the Current account and the second can be a Savings account.
Going forward, you can put your company tax savings including those for VAT in the Savings account so that 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 make the payment to HMRC from the latter.
Invoicing your clients, once you are registered for VAT
It is important to note that once you are registered for VAT, you will need to know how to add VAT when you create your work invoices.
If you are also recharging expenses to your client, you must be aware of the correct process here.
Therefore, the business must charge VAT on its fees or sales to its customers once registered. 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%.
UK VAT registration -example of charging VAT
Below is a basic summary of how the details on an invoice may look:
5 days @ £400
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VAT @ 20%
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Reclaim VAT on your expenses
Once registered and if operating 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. 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
The business will need to keep VAT records as part of filing 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.
File VAT returns
Once your company is registered for VAT, 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.
Input VAT on expenses income.
Once you complete the boxes on the VAT return, box 5 will show the amount to be paid 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 ended 30 June, the filing due date and payment deadline is 7 August.
UK VAT registration guide -pros and cons
When you register your business for VAT, what are the pros and cons? In addition, what does it mean to be VAT registered?
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 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 are registered this can give you an advantage.
When you are registered, you need to 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.
This guide will give you a good overview when considering whether I should register for VAT. There are benefits to registering, even if you are not required to do so. Of course, this will depend on your situation. 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