If you work through your own limited company you can potentially save a significant amount of money by registering for VAT. If you work through an umbrella company you can also benefit to a lesser extent if you understand how VAT is applied to your business purchases.
If your limited company's gross income exceeds £77,000 per year (VAT threshold) you must register for VAT or risk being fined. If your company is turning over less than this threshold you can also register for VAT voluntarily, and for many this is definitely worth considering.
The Flat Rate Scheme
The Flat Rate Scheme is typically recommended for contract professionals as it can reduce the administrative burden and, in some cases, mean you end up with a cash surplus.
If your limited company turns over less than £150,000, excluding VAT, in any financial year then you are eligible for the scheme. Once in the scheme you won't be made to leave until your VAT inclusive turnover exceeds £230,000.
The scheme means contractors can charge clients the normal 20% VAT, but they pay HMRC a percentage of turnover rather than working out VAT on all purchases when they come to reconcile their VAT.
When is registering for VAT a disadvantage?
If you contract directly with your clients or if you clients are in certain sectors such as financial or charity, you may find that they are not VAT registered. As a result, those clients cannot claim back the VAT on your invoices.
If you have gross billings over £77,000 per year this can put you in a difficult position as you are required by law to register for VAT. Your clients will not thank you for adding 20% to you day rate but this is something you will have to do.
An alternative to changing your date rate to account for this is to run a separate limited company that is not VAT registered and use this on contracts with clients that are unable to claim back VAT. This way your billings will not exceed the threshold. It is also perfectly legal to run two non-VAT registered limited companies in parallel if you only work in sectors where your clients cannot reclaim VAT.
Being VAT registered will open you up to inspection so it is important to ensure you only claim legitimate business expenses and that your paperwork and records are correct. It is advisable to check thoroughly when choosing an accountant that they process your VAT returns as part of their service. This can be hassle free and reduces the amount of administration you have to do for yourself.
Find out more about VAT by contacting our team.
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