Contractors' Questions: VAT registered or not - can I have the best of both worlds?


I have a VAT issue that will probably be of interest to other contractors and hope you can help.

I started trading as a sole trader earlier this year as an IT consultant. I have now started a Limited company (mainly to receive pay from the odd contract work). My problem now is that I have been helping people locally fix their computers and when I charge them, there is no VAT - as it is almost always just my time - not equipment bought.

However, as the business has started growing, I have started to get a bit of interest from businesses - who are VAT registered. As I am not VAT registered, when I buy equipment for a company's job, I cannot claim the VAT back so both I, and the client company, lose out (and I may lose a contract as I have to charge 17.5% more on equipment than a competitor.)

I want to VAT register the Ltd company to solve this issue. There is no problem with this. However, this then impacts when I go to a local private customer - who is not VAT registered - as I then have to start to charge him/her VAT. Can I register the Ltd company and use this when dealing with businesses - but use my sole trader business (unregistered) when dealing with the public at home - who are not VAT registered?

I would really appreciate any advice on this.

Answer provided by Martin Hesketh at Brookson

Yes you can operate as a sole trader and as a limited company, however if your combined turnover for the services you provide exceed the VAT threshold, you are not able to register your limited company for VAT and also operate an unregistered sole trader business.

HMRC has issued legislation - the 'Artificial Separation of Business Activities' – which states that individuals who operate more than one business which provides the same or similar products or services will be assessed as one business for the purposes of VAT. Therefore if you trade through one or more businesses which have a combined turnover in excess of £64,000 all the income will be liable to VAT, regardless of the business status (i.e. sole trader, or company).

If you do have to register for VAT there are some ways in which you can reduce the cost to your business.

If the service you provide does not involve a high level of business purchases you may benefit from being registered for the flat rate VAT scheme. Using this scheme may give you a cash benefit since the VAT liability is calculated at a lower percentage than the standard VAT charge of 17.5%. Your business would still invoice the full 17.5%, and your customer would still be able to reclaim the input VAT. However you would pay a lesser percentage over to the HMRC and you could take a commercial view and reflect any saving in your pricing to assist your private customer who is not VAT registered.

However, under this scheme you cannot recover any input VAT on your purchases or expenses. This needs to be taken into account when deciding if the scheme is for you.

I hope this helps.

Martin Hesketh, Managing Director, Brookson – the leading accountancy and tax services for freelance professionals

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