As you may already know, VAT stands for Value Added Tax and is a tax that is added to almost every product and service anywhere in the country. The VAT currently stands at 20% having increased by 2.5% from 17.5% during the recent economic crisis. However, those contractors who decide to operate through their own limited country stand to make significant savings on items and services they are required to purchase in the course of their jobs.
Register for VAT
The first step to these savings is to register for VAT. You can register voluntarily whenever you wish but if your companies total income exceeds £67,000 per year you are required to register for VAT. Once you have registered for VAT you must charge VAT on any products or services you are selling.
For example, if you were doing a project that you would normally have charged £2000 for, once you have registered for VAT you will need to charge this £2000 plus VAT (at 20%) meaning a total of £2400.
On the other hand, anything that you purchase during in the course of your work that you pay VAT on you, you can then claim back (not the full amount, just the VAT you paid on it). For example, if you have spent £120 on petrol in the course of your work, you can then claim the VAT you paid (£20) back. This applies to any work expenses whether that be office rent, industry publication subscriptions, hardware/software etc.
VAT Returns
This may already be sounding a bit confusing but the reality is that if you choose to register for VAT (or are required to do so) your accountants will submit the VAT returns and then inform you whether, after all is taken into consideration, you are required to pay additional VAT fees or to claim some back.
There are a few things to consider when deciding whether to register for VAT or not. The first is whether or not you think it would be worth it overall. For example, if you were to predict your income and expenditure, do you think the amount of VAT you would be paying would be higher or lower than the amount you would be claiming back? The second is to consider the clients you have.
If they are smaller scale clients who are unlikely to be VAT registered then this 20% increase in your fees would not be appreciated and could potentially lose you business. However, if your clients are larger organisations that are likely to be registered for VAT, they won’t think twice about it because they know that they can just claim it back.