As a limited company contractor, you can benefit from a whole range of perks. From the chance to be your own boss, to increased tax efficiency, it really pays to make the leap.
In return for these extra benefits, you’ll need to get to grips with several pieces of tax legislation, and VAT is no exception. But what is it?
Put simply, VAT (or Value Added Tax to give it its full name) is charged on most business-to-business and business-to-consumer transactions. Once your turnover reaches £83,000 a year, you’re legally required to register for VAT.
Can I register before my turnover reaches this amount?
In short, yes. You can register for VAT at any point during your contracting career. In fact, some people like to get it out of the way as soon as they set up their business. This is because it can give the impression that your company is larger and more established – which could boost your standing with other contractors and clients.
What’s it all about?
Once you’ve registered, your limited company can charge an additional 20% on all goods and services – known as ‘output tax’. Put simply, if your daily assignment rate is £400 and you work five days, you would invoice your client as follows:
Five days at £400 per day = £2,000
VAT at 20% of £2,000 = £400
Total = £2,400
Similarly, if you buy goods or services from a VAT-registered supplier, you’ll be charged 20% too – known as, you guessed it, input tax.
At the end of every quarter, you’ll need to calculate how much output tax you have charged and take away how much input tax you have paid. The remaining amount is then paid to HMRC.
Are there any other rates I can charge?
As long as your VAT-exclusive turnover is below £150,000, you can register for the flat-rate VAT scheme. Instead of paying 20% VAT on each business transaction, you pay a fixed percentage based on your company’s annual turnover.
This amount varies from sector to sector, so it’s a good idea to speak to an expert (such as ourselves) to find which one is relevant to your industry. For example, IT consultants are charged 14.5%, while construction workers pay 9.5%. Once registered, you can stay on your scheme until your VAT-inclusive turnover reaches £230,000.
When deciding whether to register for the normal or flat-rate VAT scheme, it’s a good idea to look at the amount of business purchases you make – such as IT software and office equipment. As a general rule of thumb, limited company contractors that make a large number of purchases would benefit from the standard rate of VAT – but if you only make the odd purchase, the flat-rate scheme might be the one for you.
Need more help?
At ClearSky Contractor Accounting, we understand that VAT can be a tricky subject to master. That’s why our experts are with you all the way.
We’ll not only help you decide what VAT scheme is best for you, but we’re also on hand to deal with any other queries you may have. To contact a member of our team, please call 0800 032 5326 or email firstname.lastname@example.org.