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You may also find our Flat Rate VAT Scheme Guide helpful (this is the scheme most Limited Company -Freelancer’s, Sole Traders and the Self Employed use).

VAT is complicated, the technicalities and jargon used by some accountants can make even the very clever minded slightly confused, so we’ve aimed to create a jargon free, back to basics guide to VAT. Let’s start at the beginning…

Firstly, what is VAT?

Essentially, if you are VAT registered you need to add 20% (2011) on top of whatever you sell, to make things a little more complicated there are certain things that are zero rated like: food, books, newspapers and magazines, young children’s clothing and footwear but I wouldn’t worry about these for now.

When do I ‘HAVE TO’ register for VAT?

We say ‘have to’ as there are times when you might actually want to register for VAT even when you don’t ‘have to’ but more about this later.

If in the previous 12 months your turnover has reached the VAT threshold amount of £79,000 (2013) or you expect it to reach £79,000 in the next 30 days then you must register for VAT. All the required VAT registrations forms are available at the HMRC website but one thing to remember is that the VAT threshold amount can change, so make sure to check the HMRC website each year to make sure you are in or out VAT registration.

Should I register for VAT even if my turnover won’t hit the threshold?

Well, strangely enough it could be a good idea, registering and having a VAT number may help give your company the appearance of being larger than it is. Also when quoting for work some companies mandate that suppliers must be limited and be VAT registered.

However, this may make you less competitive, for example: if you aren’t VAT registered currently and sell a product for £100, then this is all your customers will pay. If you then become VAT registered, you’ll have to charge VAT on top and will have to charge £120 or soak up the difference yourself and reduce your profit margin.

Before registering for VAT it’s probably best to have a chat with an accountant (who will invariably quote you a price plus VAT).

Can you be VAT registered and not be limited?

Yes, some businesses feel that having a VAT number adds a certain credibility and prestige to their company. For more information on VAT for a sole trader visit our VAT advice for the self employed page.

How does being VAT registered affect your Limited Company?

The day you register with HM Revenue Customs for VAT is the day you must start charging VAT on all your goods and services i.e. whatever you sell. The VAT rate is currently 20% (2011 rate).

After registering for VAT, some people get slightly confused as to when they should start charging VAT, so just to be clear it is the day you register for VAT that you start charging interest and not the day you receive your certificate-as it can take up to 30 days to receive your certificate (and you don’t want to wait this long to start charging VAT).

Whilst waiting on your VAT certificate, within this time you will need to raise your invoice’s as a total figure including the sale amount and the VAT amount, then once you have received confirmation of your VAT number you can add this to your invoice’s and separate the sale and VAT amounts and reissue to your customers. Your customers will then be able to reclaim the VAT which you have charged.

Every quarter you must then submit a VAT return to HMRC (this can now only be done online). This must show all your output tax-this is the total VAT your company has charged your customers on products and services which you have provided.

You also include the VAT charges you have incurred on purchases for your company such as supplies, equipment, stock etc, this is known as input tax. One of the main advantages of registering for VAT is that some of the VAT cost you are charged when buying goods to run your company can be noted in your quarterly VAT return report and possibly reclaimed, i.e. you may get a VAT refund.

Once the form is submitted HMRC will then review your VAT form and should your outputs exceed inputs, you must then pay the difference to the government, however if your inputs exceed the output your company is then entitled to a refund.

What are the benefits of being VAT registered?

You may be thinking, why would there be benefits to charging extra costs to my customers? But there is always a silver lining…

  • Being VAT registered means you can reclaim the input tax you have been charged when buying goods for your company-There are some goods and expenses which you will incur where you have not been charged VAT. There is no VAT on insurance, finance, credit, education, training and fund raising events, the majority of other goods you will be charged VAT.
  • Being VAT registered adds more credibility to your business, making it appear larger than it possibly is.
  • Some companies only deal with VAT registered companies-this will give your company more opportunities to deal with more suppliers.
  • Customers/clients that are VAT registered can reclaim the VAT you charge them-not necessarily an advantage for you but again it creates a more professional image and the customer may then be more inclined to use you again in the near future knowing you are both VAT registered and that they can possibly reclaim their input tax also.

Hopefully we’ve now covered for you all the basics of VAT and how it can effect you as a sole trader or Limited Company. You may also find the following VAT guides helpful:

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