What is VAT?

(2 minutes to read)

VAT, or Value Added Tax, is an additional tax on anything you sell – both services and goods. It’s charged at a standard rate of 20% on top of your invoice values. There are some zero-rated VAT goods and services - like food, sake of antiques, fundraising, medical care and property licensing – but it’s unlikely you’ll need to worry about these as a contractor. Your accountant will inform you if anything you provide is VAT exempt.

Do I have to register for VAT?

If your turnover exceeds £85,000, or you expect it to exceed £85,000 in the next 30 days, you must register for VAT. Once registered for VAT, you need to begin charging VAT on all goods and services you sell. This applies as soon as you register – you don’t wait until you receive your certificate.

My turnover won’t exceed £85,000 – do I still need to register?

You don’t need to register for VAT if you don’t hit the registration threshold. However, there are still reasons you may wish to register, as it can provide a benefit to your business.

Benefits of VAT registration

Even if you’re below the threshold, you may wish to consider VAT registration for the following reasons:

  •         You can reclaim VAT on goods and services purchased by your company, where you have been charged VAT.
  •         Many clients and suppliers, especially larger ones, will only deal with VAT-registered companies. This gives you access to a wider range of suppliers and clients.
  •         Being VAT registered lends credibility to your business. Your clients and customers can  potentially reclaim the VAT you’ve charged them on invoices.

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Downsides of VAT registration

Registering for VAT means that you have to charge VAT on top of your invoices. This means that, if you previously sold a service for £500, you’d need to invoice £600 once registered – £500, plus 20% VAT. If your customers aren’t VAT registered, either they’ll need to swallow the increase or you’ll need to take a hit to your bottom line.

What do I need to do when I’m VAT registered?

Each quarter, you’ll need to submit a VAT return to HMRC – this can only be done online. This will show the total VAT you’ve charged to your customers on goods and services. If registered with a contractor accountant, they’ll take care of your VAT returns for you.

You’ll also need to include the VAT you’ve paid when purchasing goods and services. When VAT registered, it’s possible you’ll be able to reclaim some of the VAT paid. Have a look at our Flat Rate VAT guide for more details.

Once submitted, you’ll need to pay the difference to HMRC if your VAT output exceeds your VAT input. If the reverse is true, your company is entitled to a refund.

We hope you found this guide useful. If you still have questions about VAT or would like to know if it’s beneficial to register for VAT, please call us on 01442 795 100 or drop us a line at sophie.lewis@dolanaccountancy.com.

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Why Dolan Accountancy?

With over 25 years experience in contractor accountancy helping thousands of contractors, freelancers and the self employed, Dolan Accountancy has the specialist skills, reputation and credibility you can trust. Working closely with our sister company, Contractor Umbrella, it means we can offer one low cost, fixed fee package at £105 + VAT per month. This gives you the flexibility of using both our Limited Company Accountancy Services and our award winning Umbrella Service, for one inclusive cost. We don’t believe in tiered packages or hidden extra fees, instead we aim to give you everything you need, including:

  • Free Company Formation – This is where it all begins. Once you have decided on an available name, we will form your company free of charge (if using our accountancy services) and it will be ready for you to use in as little as three hours.
  • Free use of Contractor Umbrella – With IR35 Legislation changes we understand that sometimes you are required to contract via an umbrella company. We will keep your limited company ticking over, while you work margin free via our sister company, Contractor Umbrella.
  • A Dedicated Accountant – Your accountant will be there for any company or personal tax advice that you require. We will never outsource work, even to internal teams.
  • Free Access to FreeAgent – The founder behind the multi award winning FreeAgent platform was one of Simon’s first clients, therefore it only seems fitting that we offer all of our clients access to FreeAgent, free of charge.
  • Free Business Banking – We have decided to waive our commission so our clients can use Tide free of charge for the first year.
  • Unlimited IR35 Status Reviews – We will review all of your contracts for IR35 purposes and provide you with our professional opinion as to its status.
  • Free Registered and Director’s Service Office Address – Sometimes you just don’t want your home address on display at Companies House. When you sign up to our accountancy services, we will offer the use of our address as an alternative.
  • Your Business and Personal Taxation Needs – This includes Company Accounts, Director’s Personal Tax Return, VAT Returns, Payroll, Corporation Tax and Dividend advice, to name just a few.

If you’d like to find out more about how Dolan Accountancy can help you and your business, please give us a call on 01442 795100 or email sophie.lewis@dolanaccountancy.com or jaime.thorpe@dolanaccountancy.com.