Q: When do I need to 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 2014/15 tax year this is £81,000. HMRC usually increases the threshold by around £1,000 each year so for the 2015/16 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 Accounting we offer Quarterly VAT return administration as a standard part of our all-inclusive comprehensive Monthly Service package. Contact us to find out more about our services and how we can help take the stress out of running your business.
Q: What is the Flat Rate VAT Scheme?
he Flat Rate Scheme (FRS) was introduced to make filing a VAT return easier for businesses where turnover is less than £150,000. It works by allowing the business to simply pay HMRC a flat percentage of their gross turnover in VAT rather than calculate the difference between VAT charged and VAT reclaimed.
The percentage that has to be paid over to HMRC varies based upon the exact nature of the business activity and can range between 8 and 14.5%. Most Contractors providing consultancy services would fall in the 14 to 14.5% category.
The company would still charge clients 20% but pay less over to HMRC. For example:
- Invoice for £1,000 + VAT = £1,200 charged to the client
- Client pays you £1,200
- You pay HMRC (say) 14.5% of the gross value = £174
- You keep the difference of £26
This scheme often results in extra profits for contractors, although you need to be aware that it does not allow for reclaiming of VAT on purchases unless the item is a capital asset costing over £2,000.
The scheme may not therefore be suitable for contractors with considerable purchases, or contractors making zero-rated sales (on which the percentage would still be payable to HMRC, even though no VAT was charged).
The percentage payable in VAT is determined by matching the company activity against a list provided by HMRC. Potentially making registration even more attractive, there is a 1% discount in the first year of VAT registration.
Q: How does Corporation Taxation affect me?
All Limited Companies that make a taxable profit are liable for Corporation Tax – this of course includes those set up for individual contractors to use.
For each accounting period profits are calculated for tax purposes and a Corporation Tax return (CT600) is submitted to HMRC.
If your company has taxable profits of up to £1.5 million, or less if you have associated companies, you must pay your Corporation Tax by the normal due date which is nine months and one day after the end of your Corporation Tax accounting period. For example, if your company’s accounting period ends on 31 May, your corporation tax payment is due on or before 1 March the following year. If you pay early HMRC will pay interest based upon the difference between the payment date and the due date.
A Corporation Tax accounting period can only last for a maximum 12 months, so you may find that you have two CT600 forms in any accounting period that is longer. This is very common in your first year, where your first accounts may cover 13 months.
The rate of tax paid does vary between large and small companies but most personal service companies will suffer the small company rate, which for the financial year to 31 March 2015 is 20%. The maximum taxable profit a company can earn in a 12 Month period before it pays more than the small company rate is £300,000. That limit is apportioned across associated companies, so be aware that companies under common control may suffer higher tax at a lower level of profit, and for shorter accounting periods.
The large company rate of Corporation Tax is 21% for the year ended 31 March 2014 and 21% for the year ended 31 March 2015, and applies to annual profits greater than £1,500,000. This is unlikely to apply to many contractors. From 1 April 2015 the small profits rate will be unified with the main rate, so there will be only one Corporation Tax rate for non-ring fence profits – set at 20%.
Q: How does National Insurance work for a contractor running a Limited Company?
Contractors running their own Limited Company pay two types of National Insurance (NI) through the business. Part of it is an employer liability and part of it is the employee’s (contractor’s) liability
Where an individual receives earnings and benefits from a Limited Company then the company has to pay Class 1 National Insurance on the earnings and Class1A on the benefits.
No contributions are payable on the first £153 per week (2014/15) but thereafter the employer pays at a rate of 13.8% without limit. The same rate applies to relevant benefits in kind under Class 1A. In the 2014/15 year, a company may be entitled to claim the Employer Allowance enabling the first £2,000 of employer national insurance not due to be payable to HMRC.
An employee also has to pay National Insurance contributions on their earnings also under Class 1. The same exemption applies to the first £153 per week and then the rate is at 12% on the band until earnings reach £805 per week.
For amounts in excess of £805 per week the employee pays a reduced rate of 2% without an upper limit.
Q: What has to be entered on a Self Assessment Tax Return?
Directors may have other personal income from investments, savings or other businesses, which have to be entered on a Self Assessment Tax Return (SATR). For contractors and freelancers using Limited Companies to trade, the most common form of income tax due apart from PAYE on their salary/wages is on dividends they award themselves.
Each year SATR have to be filed with HMRC no later than 31 January (in the calendar year following the end of the tax year). Payment of any tax due is made in two instalments at the end of January and July starting in the tax year.
Q: What is income tax and PAYE?
Individuals pay Income tax based upon their earnings including benefits in tax years. Income tax normally comes from earnings as an employee and is paid to you after personal tax has been deducted. Tax deducted from your earnings is called PAYE (Pay as you earn).
Q: What is the tax on dividends?
Dividends paid from a company are deemed to be paid net of 10% tax, so if you take £5,000 your tax return will show you received £5,555 and paid tax of £555 (even though you haven’t actually paid anything you retain the benefit of the credit).
As dividends are taxed at 10% up to the higher rate band, the tax that is due has already been paid, so nothing further is due. When you cross into higher rates the tax due increases to 32.5%, less the 10% tax credit, so 22.5% – this works out at 25% of the money you actually received. This additional tax, if any, is calculated and paid for on your tax return.
From 06 April 2013 there is a new additional rate of 37.5% on dividends paid when total income is in excess of £150,000.
Q: As a Limited Company what are the tax requirements?
From the company’s point of view it will probably have to submit VAT returns, and account for PAYE, National Insurance and Corporation Tax on profits. Individuals have to submit personal tax returns under self assessment.
If a company is VAT registered it must charge VAT on invoices it issues. The client then pays the total invoice value, and your Limited Company pays the VAT element over to HMRC each quarter. The amount payable can be reduced by any VAT your company has paid on business purchases, for example on stationery, telephone bills.
HMRC allow certain companies to register for VAT under the Flat Rate Scheme. This enables the company to simply pay a pre agreed (“flat”) percentage of turnover as VAT rather than calculate the actual amount due on sales less the amount repayable on purchases. The advantage of this is that it’s easier, and the company will make a small profit.
We will advise you on the VAT scheme appropriate to you, and the amounts that are due to be paid. It is then your responsibility to make the actual payment.
This is paid each quarter according to the tax and NI deducted from any wages paid. We will inform you of the amounts due in advance, and you simply then make the payment.
Corporation Tax is paid 9 months after your company year end, and is based on the profits.
Personal Tax this is payable each January and July, as per your self assessment tax return. The amount due depends on the value of dividends, rental income, bank interest, capital gains and anything else not taxed at source.