An introduction to VAT

VAT, standing for value added tax, is a tax administered by HMRC on sales made by businesses in the UK.

Once a business reaches a certain annual turnover (£81,000), it is legally required to register for VAT, at which point it receives a VAT number. Once registered, a company can add VAT when charging for goods or services sold to businesses or consumers. Regardless of whether you are a B2B or B2C enterprise, you can charge this tax during the point of sale (input tax), and equally reclaim the VAT paid out when you buy products for your own business (output tax).

If you are a self-employed contractor or run a limited company, you may or may not be required to register for VAT depending on the criteria of your business. Like most tax-related issues for contractors, VAT can seem complicated at first. At Futurelink Group, we’re here to provide jargon-free explanations you can understand, as well as offer a plethora of services to help you make sense of this form of tax.

VAT at a glance

VAT was introduced in 1973, prior to which the British government levied Purchase Tax.

VAT is essentially just that – a tax levied on purchases you make as a business, and on the services and goods you sell as a business. It can be applied to purchases made within the UK, as well as imports from both within and outside the EU. There are three basic classifications of VAT, standard, reduced and zero, the rates of which are 20 per cent, 5 per cent and zero respectively. There are a number of rules that dictate what qualifies for reduced or no VAT, and consulting with a VAT tax expert can help you understand more about these. Once a company posts an annual turnover of £81,000 or more (the VAT threshold), the company must register for VAT. If turnover is over that threshold but less than £150,000 per annum, as a self-employed business owner, you could qualify for the flat rate VAT scheme.

The flat rate VAT scheme was introduced in 2002, and seeks to make it easier for contractors and small business owners to calculate VAT. Through this “simplified” scheme, contractors charge the standard rate of VAT, but instead of having to work out the VAT on each transaction, the contractor can pay a percentage of inclusive annual turnover. This means easier recordkeeping, and you also receive a first-year discount. However, if you run a limited company or are a contractor, you may not have to deal with VAT yourself at all if you work through an umbrella company.

How Futurelink Group can help

An umbrella company issues payment to a contractor on a PAYE basis, after all the necessary tax and NI contributions have been made. As such, they are responsible for the VAT.

With umbrella company services from Futurelink, you can stop worrying about VAT allowances and rates, as we take care of everything for you. An umbrella company essentially acts as an employer, paying out wages less tax and NI after they have been paid. As we deal with the invoices, we take care of making sure the correct VAT is paid so that you don’t have to. We assume responsibility for calculating the right VAT and paying the right amount to HMRC, meaning the amount you receive from us is your take-home pay. If your profits fall within the outlined criteria, we can help you register for the flat rate VAT scheme, too. This helps simplify your bookkeeping, and because it is a more straightforward process, there are fewer margins for error, giving you total peace of mind. The rate at which you pay back VAT to HMRC can be lower depending on your profession, which can also mean more money in your pocket at the end of the day. As your business grows, you need tax-efficient solutions to help you make the most of your profits – and that’s where we can help.

As the owner of a limited company or as a contractor, you have a number of things to manage on a day-to-day basis, especially where tax is concerned. Reduce the stress, and make life easier by enlisting help from the team at Futurelink Group. Our experts are here to help you navigate the allowances, exceptions to the many rules and any unclear terminology, explaining how VAT works in plain English. With our straightforward services, it can be easy to ensure you remain compliant whilst minimising the amount of time, effort and money spent on bookkeeping and working out VAT input and output tax on each transaction.

To find out more about how Futurelink Group can provide assistance to contractors and owners of a limited company where matters of VAT are concerned, call us on  +44 (0)1923 277 900.

Now that we have given you a brief introduction to VAT, you might also find the following pages of use:

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William Cadden, Self-Employed Contractor

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