Guide to VAT registration

As a contractor, irrespective of whether you are self-employed or run your business through a limited company, you will be required to register for VAT when your turnover reaches the VAT registration threshold. For the year 2017/18, the VAT threshold is £83,000. That said, there are certain situations where businesses who have not yet reached this threshold may want to register for VAT without their turnover reaching this level.

On this page of The Smart Contractor website, we’ll guide you through the process of VAT registration as well as share with you why some companies choose to register for VAT even though they don’t have to.

The first thing to say about VAT is that it needn’t be complicated. Many contractors deliberately retain their turnover lower than the threshold because the whole notion of being VAT registered fills them with fear. It’s only fair to say that processing VAT is structured and strict and the penalties for getting it wrong can be severe. However, like anything in life, with the right procedures in place and the right guidance, getting it right is easy.

Dealing with paperwork brought on by VAT registration

Who can register for VAT?

Self-employed and limited companies can register for VAT. Even businesses that have not reached the VAT threshold can register for VAT if there are good reasons to do so.

What are the advantages of registering for VAT?

When you register for VAT, you will need to charge VAT, but you will also be able to claim back VAT on the purchases you make.

When it comes to business success, some contractors think that being registered for VAT makes their business seem more important in the eyes of their clients. While this is a subjective viewpoint, it is a fact that certain businesses will only deal with contractors who are VAT registered, so, depending on your unique situation it may be worth considering.

There is also the big advantage that in most cases, contractors can register for the flat rate VAT scheme, which means that they charge VAT at 20% but repay the VAT at a lower rate, creating an opportunity to increase their income.

When you must register for VAT

As either a self-employed contractor or a limited company employing one or more contractors, it is a requirement to register for VAT either when your turnover has reached the VAT threshold in the last year OR if you are aware that it will do so in the next 30 days. Registration for VAT is a simple process and can be done online on the HMRC website.

Making sure you have the right support in place

Registering for VAT online is quick and easy, but that’s only the start. It is really important that when you register for VAT, that you know the impact it will have on your business and the responsibilities you are taking on.

It is worth noting that for some, VAT registration can make some businesses less appealing. In a situation where you previously didn’t charge VAT and are supplying to non-VAT registered companies, your prices effectively increase by 20%. This can make you uncompetitive overnight unless you absorb the 20% increase yourself, which effectively reduces your profit margin.

Registering for VAT when you’re not prepared can also result in problems in the future. In order to adhere to the VAT requirements, it’s important that you have a system in place to manage your responsibilities and make provision for the payments you will have to make. Failing to do so can store up problems for the future. Again, it’s worth saying that none of this is complicated, but you do need to be prepared.

It is for these reasons that prior to registering for VAT, it makes great sense to make sure you have the right support in place.

Once you have a VAT registration

Within a period of 30 of registering for VAT, you will receive your VAT certificate. However, you must start charging VAT immediately upon registration. That said, prior to having your VAT registration number, you will not be able to describe the 20% VAT portion of your invoice as VAT. Because of this, as an interim measure, your accountant will advise you to charge the total amount of the sale plus VAT, without marking the VAT portion as VAT. As soon as you have received your VAT registration number, you need to add this to your invoices. At this point, you will be able to replace the interim invoices you have sent to your clients so they can reclaim the VAT portion at their end. Needless to say, it is important to communicate this change to your clients in order to avoid confusion or panic.

VAT returns must be submitted quarterly to HMRC and should show the VAT you have charged your clients as well as the VAT you have paid on your purchases. It is essential to stay abreast of the amount you have collected that you will need to pay over to the government. In most cases it is a good idea to keep your VAT provision funding completely separate from the other funds your business has.

Other things you should consider when registering for VAT

Flat Rate VAT scheme

The Flat Rate VAT scheme was introduced by the government to make VAT more appealing for small businesses. In a nutshell, registering for the Flat Rate VAT Scheme as a contractor means that you can effectively generate income by charging VAT at 20% and paying it at a lower rate. To find out more about the Flat Rate VAT scheme, why not get in touch?

VAT penalties

If you are required to register for VAT and fail to do so, you will face penalties, so it really is something you need to stay on top of.

Volunteering to register for VAT when you don’t have to

Some contractors register for VAT even though their turnover does not require them to. In order to do so, you need to demonstrate your eligibility to do so to HMRC. While it may seem a strange thing to do, certain contractors believe that being VAT registered gives their business more gravitas in the eyes of their clients. Prior to taking this action, it is always best to seek professional advice.

If you’re at the point of registering for VAT, or facing a dilemma about VAT registration, why not get in touch so we can help you? At The Smart Contractor we will work with you so you make the right decisions for your business, both now and in the future.