Value Added Tax (VAT) is a tax charged on goods and services. Currently the standard VAT rate is 20% (e.g. If the invoice for your services is £1,000 you would add £200 (£1,000 x 20%), making the total invoice £1,200).
Your company must register for VAT if the annual turnover of the company is expected to exceed £85,000 (2021/22) in any rolling 12 month period. It may, however, be beneficial to register for VAT even if your turnover will not reach this threshold.
Many small businesses that register for VAT also opt to register for the Flat Rate Scheme.
Registering for the Flat Rate Scheme will simplify the operation of VAT and can save money for companies that have few expenses on which there is VAT to reclaim.
Flat Rate VAT means you charge 20% VAT on your invoices, but only pay VAT to HMRC at a reduced flat rate. You cannot claim VAT back on expenses under this scheme (except on certain capital expenditure over £2,000), but any difference between the VAT you collect from your clients and the amount payable to HMRC, is treated as income to your company.
The rate is dependent on your company’s business category, however most contractors will be regarded as a limited cost trader with a flat rate of 16.5%.
You will be regarded as a limited cost trader if the amount you spend on relevant goods including VAT is either:
- less than 2% of your VAT flat rate turnover
- greater than 2% of your VAT flat rate turnover but less than £1,000 per year
You can read more about what qualifies as ‘relevant goods’ here , however your accountant at First Freelance will be happy to advise you on whether your business meets the criteria. You can reduce your flat rate by a further 1% until the day before the first anniversary of your VAT registration.
To join the scheme, your estimated turnover (excluding VAT) in the next year must be less than £150,000 per annum. Once you join the scheme you can stay in it until your total business income is more than £230,000 (including VAT).
The example below shows how the Flat Rate saving is calculated and how savings can be made by simply being Flat Rate registered. In the example, the newly Flat Rate registered company meets the definition of a limited cost trader and has a Flat Rate of 16.5% (as per HMRC rates).
|Standard VAT||Flat Rate at 15.5%
(reduced 1% in first year)
|VAT charged at 20%||£200||£200|
|VAT paid to HMRC||£200||£186
(15.5% x £1,200)
|Benefit to you||£Nil||£14
(£200 – £186)
In this example, the company retains a benefit of £14 per week.
Some goods and services are exempt from VAT. Businesses that only sells goods or services that are exempt from VAT, cannot register for VAT or the Flat Rate scheme (e.g. certain Medical practitioners and health professionals are excluded from registering for VAT).
As a director, you have important responsibilities with regards to your company’s VAT, including:
- Submit a quarterly VAT return. The VAT return is due one calendar month and 7 days after the end of your VAT period (e.g. if the return is up to 31st December, the return is due by 7th February).
- Paying any VAT owing to HMRC. VAT payments due to HMRC must clear on the same day as the VAT return due date, so you have within 5 weeks, approximately, after the return period to make the payment.
HMRC will charge penalties on late VAT returns and interest and surcharges on late VAT payments, so it is necessary you comply from the outset.
First Freelance provides the following services to our clients:
- VAT Registration
- VAT Flat Rate Scheme registration
- Preparing VAT returns and advising on VAT payments due to HMRC