View Full Version : Should I voluntarily register with the VAT man?

10th May 2004, 15:25
I've recently formed a ltd as I've got an IR35 friendly deal to supply deliverables to a software co. I'm not currently registered with the vatman as the co will have a turnover of only 20-30k in its 1st year or two.

I need to shell out maybe £1500 on hardware and software licences - is it worth the hastle of voluntarily registering with the vatman so that I can claim back a few hundred of vat?

And also if I do register will that mean that I'll have to charge the client 17.5% extra that they'll not be able to reclaim?

10th May 2004, 15:30
it is always worth registering - you can't lose money by registering, only gain (from your licences etc.)

Your clients will be able to reclaim VAT (as long as they're companies, and themselves VAT-registered), so it's not an issue for them.

VAT is just paperwork really

10th May 2004, 15:49
There’s not a lot of hassle involved in being VAT registered. It’s pretty simple by comparison to everything else involved in running a Ltd company. Money for nothing if you ask me. Take a look at the flat rate VAT scheme which makes things even more simple.

If you are supplying to a software company, the chances are they will be registered. If they are not registered they will not be able to reclaim the VAT, and this could be a disincentive for them to use your company.

10th May 2004, 20:42
Yes, the flat rate scheme is fairly painless, and once you've bitten the bullet and done your first VAT return it's nice to be saving a few quid. Do do the sums beforehand to make sure you won't be out of pocket.

10th May 2004, 21:59
ask for cash accounting option, that way when the customer pays vat, you pay vat otherwise you may end up shelling out VAT for bad debts.

Talk to the VAT man they are helpful.

11th May 2004, 09:52
Yes, the customer is VAT registered so they will I guess be able to claim back the vat and me being registered isn't a disincentive for them to use me. And I'll ask for the cash accounting option so I avoid VAT on bad debts.

I've had a look at the customs & excise site re the flat rate VAT - looks interesting.
If I've understood it correctly, I have to levy VAT at 17.5% on the (say for example) £25k of services I supply, which is £4375. But only have to hand over 13% of 25k to the C&E, which is £3250 - that can't be right can it, as I'll be making over £1k on my VAT!?

11th May 2004, 10:03
i made the same mistake.

See a post on the general board - the 13% is on your gross not you net

11th May 2004, 10:25
VAT is quite simple really:

1) you pay it on goods/services you pay for, and claim it back

2) you charge it on goods/services you provide, and pay it back

compared to tax, it's a doodle.

you cannot make money nor lose money with VAT. the only thing is that now you can buy stuff VAT-free, unlike the non-incorporated general public. That's all.

11th May 2004, 11:24
I must admit to being a tad confused here.
The VAT model I have in my head suggests that if I charge the customer, say 10k, then I add £1750 to the bill in VAT. The customer gives me £11750 and I give the £1750 VAT component to the C&E. The customer reclaims the £1750 from them and money goes in a nice neat circle.
Do I have an additional VAT liability to pay on the gross (£11750 x 13% = £1527) to the C&E or something?

Sorry if I've completely misunderstood the situation!

Reclaiming the VAT on business purchases seems pretty straightforward though, and will probably save me a few hundred quid a year.

11th May 2004, 11:45

You don't have any VAT liability of the gross - otherwise you'd lose money every time you charge VAT to someone!

Your understanding was correct up to (and including) the point where said "money goes in a nice neat circle".

That's exactly right - money goes into a circle when transactions are between VAT-registered companies. When it's the private, general public, then VAT goes to the VATman.

For example, if you buy a CD, the store charges you 17.5% VAT, which it then repays to the VATman. You can't claim it back. The VATman wins.

But when your VAT-registered company has to pay VAT for goods/services, you claim back exactly the VAT you have paid.
And when you charge VAT to a client, you have to pay it back to the VATman. Nothing more, nothing less.

So, in other words, the VATman does not make any money from transactions that are between VAT-registered companies. They only make money out of stuff being sold to individuals (and imports in the UK too but that's another story..)

11th May 2004, 12:27

if it is your first year of trading you get another 1% allowance so

£1000 * 1.175 = £1175 * 12 % = £141

thats £34 in your pocket for a bit of paperwork

11th May 2004, 12:43
Ah I see, so in the above case I do actually get to keep some of the VAT I charge my customer (£34 in this case). At least for the 1st year. The customer still only gets a bill for £1175 per 1k of services, yes? Now I see why the allowance is levied on the gross.

And of course I get to reclaim the VAT on a new laptop (for business use), broadband (ditto), petrol for business travel, etc!

11th May 2004, 12:57

There are two different ways of operating VAT being described here. The normal way described by Rebecca. You add 17.5% VAT on your invoices and pay it to the VAT man less any VAT you can claim on your expenses.

The other way is the flat rate vat scheme. You still charge 17.5% VAT on your invoices, but you are not allowed to claim back any of the VAT on your expenses (other than some very big purchases). Instead you pay the VAT man a flat rate based on the type of business you run. For many IT contractors that rate is 13% (of your gross income). It simplifies things, and if you don’t have many expenses you may save money. You have to apply to use this scheme. In the first year of VAT registration you can deduct an extra 1% from the rate.

11th May 2004, 13:11
OK thanks for that clarification planetit - the penny's dropped.

I'll do an estimate of the numbers and choose whichever method's likely to leave me most in pocket (the flat rate one is my guess).

Thanks for the contributions everyone.

11th May 2004, 14:01
Yes thanks PlanetIT - I didn't know about the flat rate scheme and will give that a look

11th May 2004, 14:08
www.hmce.gov.uk/business/services/flat-rate-dets.htm (http://www.hmce.gov.uk/business/services/flat-rate-dets.htm)