I am a contractor with revenue below UK's VAT threshold. Should I register for VAT?

Question

I am an IT contractor based in London. I understand that there is a threshold for VAT of £73,000. In my current business, I have not exceeded that threshold as of yet but expect to within the accounting period.

I have spoken to my accountant briefly about this matter but he hasn't really advised me properly about this topic. So here are the questions:

(1) Should I register for VAT?

(2) What benefits would registering for VAT include?

(3) Would I not just hold onto the monies for HMRC?

Thanks in advance Stack!

Edit: I forgot to mention I have a Limited Company by shares.

Answer 1

I love the flat rate VAT scheme. It's where you pay a percentage based on your industry.

An example might be Computer repair services, where you'll pay 10.5% of your total revenue to the HMRC. But you'll be invoicing for VAT at 20% still.

Would definitely recommend registering for it since you're expecting to cross the threshold anyway. And like DumbCoder said, you also get a first year discount of 1%, so in the example above, you'd end up paying 9.5% VAT on your turnover.

I personally found it a pain to invoice without VAT (my clients expected it), so registering made sense regardless of the fact I was over threshold. The tricky bit is keeping under the £150k turnover so you stay eligible for the flat rate. It does get more complex otherwise.

Answer 2

If I remember correctly, once you're about to exceed the threshold you really don't have a choice and have to register for VAT.

As DumbCoder mentions, the quarterly VAT returns isn't that much of a hassle, plus if you fall under a certain threshold, you can sign up for the annual accounting scheme for VAT, which means you'll have to only put in a single return, but HMRC takes more payments out over the course of the year. This is what I did when I ran my own limited company in the UK.

Answer 3

(1) Should I register for VAT?  – If it is below the threshold amount it is purely voluntary. If you register for VAT, you would have to charge VAT and then do returns every quarter. If you can take up this bit of hassle, it doesn't make much of a difference. One thing you need to consider: you get 1% discount during your first year of registering for VAT. If you want to save this discount for when you really need to pay VAT, it could be helpful.

(2) What benefits would registering for VAT include?  – Except for reclaiming VAT, where you pay VAT for business expenses, not much.

(3) Would I not just hold onto the monies for HMRC ?  – You wouldn't hold any money for HMRC. They will send you notifications if you do not file your returns and pay your VAT quarterly.

And get everything cleared from your accountant. If your accountant doesn't answer properly, make it clear you need proper answers. Else change your accountant. If you do something wrong and HMRC gets after you, you would be held liable – your accountant can take the slip if you signed on all business documents provided by your accountant.

Answer 4

The most important thing to remember is that being VAT registered, you must add VAT to every bill, so every bill will be 20% higher. If the bill payer is a company, they don't care because they deduct the 20% VAT from their own VAT bill. If the bill payer is a private person, their cost of your services has just gone up by 20% and it is going to hurt your business. So the question is, what kind of customers do you have?

But if your customers are companies, then the flat rate scheme mentioned above is very little work and puts a nice little amount of extra cash in your pocket (suitable if your bills are mostly for your work and not for parts that you buy for the customer and bill them for).

Answer 5

If you are providing VAT-liable services (you probablly are) and you register normally for VAT then you will be able to reclaim VAT on your buisness purchases but you will have to charge VAT to your clients.

So the question really comes down to will your clients regard you adding VAT to their invoices as a price increase or not. That is likely to depend on whether your clients are in a position to claim-back the VAT you charged them.

If you are working mostly for VAT registered buisnesses who perform primerally vat-liable (including zero-rated) activities then registering for VAT is likely in your financial interests (though it does mean more paperwork). The flat-rate scheme may be better still.

If you are working mostly for private individuals, non VAT registered buisnesses or buisnesses which primerally perform VAT exempt* activities then registering for VAT when you don't have to is most likely not in your financial interests.

* Note: VAT exempt and zero rated for VAT are very different things even though they look similar to the customer.