New contractors’ guide to VAT

New contractors’ guide to VAT

One area that new Limited Company contractors need to think about from the start is the on-going tax liabilities of their company. Getting it wrong can potentially result in hefty financial penalties or worse, so it’s advisable to consult an experienced contractor accountant  to get the best advice for your circumstances. One type of tax which will be relevant to most Limited Company contractors is Value Added Tax (VAT).

 

VAT – what it is and where it applies

VAT is charged on the final consumption of a variety of HMRC specified goods and services and is applied to every stage of production and distribution. Most business-related goods and services fall under VAT so the majority of Limited Company contractors are likely to be subject to VAT charges.

 

How VAT is calculated

At its simplest a contractor VAT bill is the balance of the VAT you have charged to clients, minus the VAT you have claimed back on allowable items you purchased. If you have paid out more in VAT than you have charged, HMRC will refund the difference. The standard UK VAT rate is currently 20%. However, there are other rates which could apply depending on the type of goods or services being sold and where (in the world) they’re consumed.

 

VAT Accounting Schemes

HMRC offers schemes designed to help contractors in terms of how VAT is calculated and administered.

There are two options for accounting for VAT available to companies with a taxable turnover of up to £1.35million these are:

  • Cash Accounting – with this option the company only accounts for VAT when their invoice is actually paid. This can be helpful for the cashflow of the business. (Under this scheme you can also only claim back VAT on purchases once you’ve actually paid the invoice.)
  • Annual Accounting – with this option the company only submits one VAT Return a year. Monthly payments of the VAT bill amount are made to HMRC throughout the year. This too can be helpful for cashflow.

 

The Flat Rate Scheme

HMRC offers the Flat Rate Scheme which is designed to make VAT administration easier for many contractors. Rather than claiming VAT on each invoice you pay a percentage of your company turnover. For example 14.5% for an IT consultancy. There are main advantage to this scheme you can continue to charge clients 20% while you give a smaller percentage to HMRC. One downside is that you cannot claim the VAT back on your own business purchases unless they are capital purchases over £2000, which could be an issue for some business types. Another is that if you make a lot of zero rated or VAT exempt sales you’ll still be charged VAT on those sales, even though you’re not charging the client.

 

When you should register for VAT

VAT registration is mandatory for companies who have made taxable sales in the last 12 months above the current VAT registration threshold amount. For the 2013/14 tax year this is £79,000. HMRC usually increases the threshold by around £1,000 each year so for the 2014/15 tax year the threshold is likely to be higher. Even if your sales are unlikely to reach this level you can still voluntarily register your company for VAT. Many contractors choose to do this as it can offer several advantages as claiming back VAT on invoices they receive. If you decide not to register but you believe you’ll exceed the threshold in the near future (if you win a huge contract for example) you should register as soon as possible to remain within HMRC rules.

 

How to register for VAT

You need to apply directly to HMRC to register your company for VAT. This can be done online using their website or by post. You can do this yourself or your Intouch accountant can do this for you on your behalf.

 

Quarterly VAT returns at Intouch

At Intouch we offer Quarterly VAT return administration as a standard part of our comprehensive monthly service package (£98 + VAT per month). Contact us to find out more about our services and how we can help take the stress out of running your business.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Contracting overseas and EC sales list requirements

Contracting overseas and EC sales list requirements

While contracting with overseas customers can add significant revenue to your business it’s important to get the tax elements right to avoid any penalties from HMRC.

If you’re a VAT registered Limited Company you must report your sales of applicable goods and services to VAT registered EU businesses by submitting an EC Sales List (ESL). However, if you have a contract with an EU client but the services are provided from the UK an EC Sale List is not required.

The list must show details of all sales in the period, no matter how small and must specifically state:

  • Customer details – including the VAT registration number from their own country
  • Relevant country code
  • Value of the goods/services in £s sterling

If you have made no EU sales in the period then no ESL submission is required.

 

Should I be completing an EC Sales List?

If you fill in Box 8 of your VAT return HMRC will automatically send you an ESL. If you don’t do this HMRC have a list of other business activities which must be reported by submitting an ESL.

If your supply of goods or services to VAT registered EU businesses is small then you may be eligible to ask HMRC for permission to submit a simplified ESL. This may apply if:

  • Your annual turnover is below the VAT threshold plus £25,500
  • Your annual sales to other EU countries are no more than £11,000
  • You do not sell New Means of Transport

With a simplified ESL you don’t need to list details of every sale, you can enter a nominal value of £1 and you only complete the ESL once a year, on a date you agree with HMRC.

If you are unclear on what kind of submission you should be making contact your accountant who will be able to advise you.

 

The Reverse Charge

Some services are subject to a ‘reverse charge’ meaning that the customer, not the supplier, must account for the VAT. The rules on this are complex as they are based on ‘place of supply’ of the services and refer to which country’s VAT rules should be applied to the sale. It is advisable to speak with your accountant regarding this to ensure your invoices show the correct VAT treatment.

 

Contracts with countries outside the EU

If the ‘place of supply’ of your service is outside the EU – eg: the USA – then your supply of services is outside the scope of EU VAT.  In this case you don’t charge VAT and the sale is not included in your VAT return.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.