Becoming VAT Registered As A Contractor

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November 07, 2016

Hitting the VAT threshold is a bittersweet moment for any contractor. On the one hand, it’s a sure sign that you’re doing something right, drawing in an ever-increasing salary from high-value contracts. On the other, the prospect of facing more tax liabilities may seem, at first, an unwanted burden.

VAT is somewhat shrouded in mystery for the self-employed, meaning it can be hard to get a handle on what it is, the pros and cons of dealing with it, and how to go about registering. Thankfully, we’re here to shed some light on the issue:

The basics of VAT

In the UK, every business with an annual turnover of £83,000 or more must register for Value Added Tax (VAT). This is usually 20% levied on sales, collected on the last day of the month following each VAT quarter.

As well as paying tax on your own revenue, you can claim relief on expenses you incur throughout the quarter, whether that’s outsourcing jobs to other VAT-registered contractors, buying a new device, or stocking up on stationery for your office.

As such, it’s not all doom and gloom for the self-employed. In fact, we often recommend becoming VAT registered as a contractor even before you hit the threshold. Why? Well, when you’re dealing with large organisations that also pay VAT, you can simply add this on your invoices and they can claim it back, meaning you’re no less competitive.


Types of VAT schemes

When you come to explore VAT registration, there are a number of options to consider. The type of scheme you choose will depend on your earnings and business model, but they include:

Annual accounting – you pay installments throughout the year, based on your previous year’s earnings or VAT liabilities. Should, at the end of the period, you find that you’ve over- or under-paid, the balance will be settled with HMRC in your annual VAT return.

Cash accounting – if cashflow is a concern, this VAT scheme allows you to settle your tax liabilities after you’ve received the funds from your clients. However, this also means you can’t claim relief on purchases until you’ve paid the supplier.

Flat rate scheme – to simplify things, many contractors choose the flat rate scheme, meaning you pay a flat rate percentage of your turnover as VAT. You can’t, however, reclaim VAT on purchases.


Becoming VAT registered

This might all sound complicated, but a team of dedicated contractor accountants (like us!) can help you explore the options and choose a scheme that’s right for you. It usually takes around eight weeks to register for VAT, so it’s worth contacting your accountant as soon as you start to think about making the switch.

Bright Ideas Accountancy is here to take the hassle out of dealing with HMRC, so whether your current accountant isn’t clued up on VAT or you’re struggling to juggle everything alone, we’re here to help. To have a chat with our accountants, call 0161 669 4221 or email today.

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