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A contractor’s guide to VAT

26th November 2016

VAT is a tax added to most goods and services in the UK. Any business, including contractors working as a limited company, that earns over £83,000, needs to charge customers and clients an extra 20% on the prices of any products or services they sell.

However, contractors can use VAT charged to customers to offset any VAT they pay on items and services related to their business, meaning that they could potentially save money by voluntarily registering for VAT. This is true mainly for contractors who often buy products or services from businesses which charge tax, otherwise you would be hurting your customers by charging an extra 20% without getting any benefit yourself.

Creating invoices when you charge VAT

If a contractor is registered for VAT, they need to add the extra 20% to the invoices they send to clients. Every three months, the contractor must add up all the tax they have charged and include in their VAT return. Your invoices also need to include an invoice number when you are VAT registered.

Filing your VAT Return

When it comes to filing your VAT Return, you need to add up the VAT you have charged (known as output tax) and take away the total tax you have paid to other companies (known as input tax). Depending on whether you paid more VAT than you charged, or vice versa, you will either have to pay VAT to HMRC, or HMRC will pay you the difference.

Simplified VAT for contractors

Some contractors might prefer to use the flat rate VAT scheme, where you can pay a certain percentage (depending on your type of business) on your turnover rather than having to spend time recording each individual VAT payment or charge. However, the flat rate VAT scheme does have some disadvantages, such as if you usually receive VAT repayments from HMRC – you would no longer be able to reclaim this VAT.

Can VAT registration be a bad thing?

In some circumstances, such as when contractors deal directly with their clients rather than a contracting agency, or if many of their clients are charities, they will be dealing with clients who are not tax registered, meaning that the contractor will have to add an extra 20% to their prices when their clients can’t claim the VAT back.

VAT inspections

Every five or six years or so, VAT-registered contractors can expect to face VAT inspections by HMRC, though this timeframe isn’t set in stone. They will check that the contractor is keeping all the right records and paperwork, and that VAT isn’t being claimed on expenses that are actually personal and not business-related. Pearl Accountants has specialist contractor accountants, so with us by your side you’ll always have the right paperwork, and only be claiming VAT on the right things, so you won’t need to worry about passing a VAT inspection.

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