When doing business in the UK, VAT has to be taken into account in calculations. In terms of the sheer impact on the profitability of contracts and the actual costs of your expenses, you probably interact with VAT more often than any other tax.
While it’s mostly a straightforward calculation, like everything in the world of finance there is enough complexity in how it impacts business decisions to create many edge cases.
So with that in mind, let’s look at some of the key questions we’re often asked.
What is the VAT Rate?
On most goods and services, VAT is charged at a 20% rate. From time to time you may encounter items charged at the Reduced Rate, which is 5%, and there are some items which are exempt from VAT.
For the most part, zero rate and reduced rate transactions are on things that are less likely to affect your business – for example, childrens’ car seats and your home energy bill are both charged at the reduced rate – but as a contractor, ultimately your decisions will be driven by your financial goals in your wider life, so being aware of them can help.
HMRC does offer guidance on the VAT rates for different goods and services if you feel the need to check.
What is the VAT Threshold?
The VAT threshold is now set at £90,000, meaning that if your taxable turnover in a 12-month period exceeds £90,000 you must register for VAT. If you realise you will pass this threshold in the next 30 days, you are required to register at that point.
What Happens When You’re Registered?
Once registered, the goods and services you sell must have the appropriate VAT rate applied. For almost all contractors, this will be the 20% rate.
This, offset by the VAT you pay on goods and services bought in, will form the basis of your quarterly VAT return, which you must pay to HMRC.
There are many businesses and organisations that only deal with VAT-registered suppliers as that can make assembling their VAT returns much more straightforward, and adding your VAT number to your invoices, other paperwork, and website can act as a trust signal to other businesses as it shows stability on your part.
You can also reclaim VAT on many expenses (for example, fees for professional services).
As such, some contractors register well before they reach the threshold.
However, there are situations where this may not be advisable! The specific point to make the shift will vary depending on your goals and your financial projections, so check with a professional first.
