The Basics of VAT

Quick Guide

  • VAT is administered by HMRC
  • It is not necessary to register a Company for VAT until its turnover hits a certain level.
  • The benefit of registering regardless however, is that this enables you to recover any VAT that you incur on things that you buy for the business (e.g. computer equipment/accountancy fees). The only downside is filling our quarterly VAT returns if you don't have an accountant that does this for you.
  • VAT registration usually takes about 8 weeks, but this will not prevent you from invoicing your agency/client or reclaiming VAT on expenses. Until the Company is registered you simply raise sales invoices without adding on VAT.
  • Once the Company is VAT registered you must show the registration number on your invoice and add VAT at the appropriate rate.
  • You will receive a green VAT100 form on a quarterly basis which should be forwarded to your accountant for completion as soon as you receive it.
  • VAT payable must be paid by the last day of the month following the VAT quarter. There are penalties for late payment.
  • In order to recover VAT on things that you buy for the business you must obtain a "VAT Invoice" showing the supplier's VAT No. Always ask for a VAT invoice as they will not automatically be provided every time.

Basics of VAT

VAT is a tax charged on sales made. A VAT registered business therefore has to charge VAT on sales, but can reclaim VAT on purchases made from other VAT registered businesses.

At the end of every three months you have to make a return to the VAT office (a VAT Return) which details how much VAT you have charged and how much you are reclaiming. You will then pay the difference, or if you have claimed more than you charged, the VAT office will send you the difference.

In most cases VAT is currently charged at 20% although there are situations where a sale can be either "zero rated" in which case you do not charge VAT but you can reclaim it, or "exempt" in which case you can neither charge nor reclaim VAT.

A business must register for VAT once the sales exceed the threshold in a year, or else you can make a voluntary registration even before hitting this threshold.

Why would you make a voluntary registration? Well, if you are dealing mostly with other VAT registered businesses then you would register to enable you to reclaim VAT on any business purchases you make sure as computer equipment, training courses and so on. If you deal with members of the public, or businesses that are not VAT registered it may or may not be beneficial still to make a voluntary registration. It just depends on how price sensitive your market is, and how much VAT you would be able to claim back. Your accountant will be able to help you make this decision.

To register for VAT you can apply on line here.

Otherwise ask your accountant or local VAT office to provide you with a VAT 1 form. The registration takes usually about 6 – 8 weeks to come through.

Further Reading

Vat and flat rate VAT for IT contractors.

Contractors' Questions: How do I use the VAT cut?
What you can and can't change on invoices to reflect the VAT reduction.

Revenue raises limit to self-correct VAT errors
More traders can fix faults in their VAT returns without disclosure.

Contractors' Questions: VAT registered or not - can I have the best of both worlds?
Can I operate two companies, one registered for VAT and one not registered, so I choose which to invoice through to suit a client's VAT status?

New VAT rules for home computers
Bosses who can't prove the PC is only for work must claim less.

Editor's Note: Related Reading -

Contractors' Questions: When to register for VAT?

Contractors' Questions: Should I register for VAT?

Contractors' Questions: Must I always appy VAT if I'm VAT-registered?

Contractors' Questions: Do I need a VAT number for EU clients?

Contractors' Questions: Should I VAT-register for my Czech contract?