VAT stands for Value Added Tax. It was introduced in Britain in 1973 at a rate of 10% and was referred to as the simple tax, and has become increasingly complex ever since. From the 4th of January 2011 the rate is 20%.
VAT was part of the price the UK paid for entering the Common Market. Its origins are thought to have originated in Germany and were formalised by Maurice Laure of France in 1954. It is in essence a tax that VAT registered businesses have to pay on their sales.
VAT registration is not compulsory, you don’t have to register for VAT unless your total vatable sales for the year on a rolling basis are over £77,000 (from 1 April 2012) this threshold usually changes every year.
If you don’t have to register for VAT you still might want to as it enables your business to reclaim VAT incurred on business expenses.
Before you do this you should consider who your customers are. If they are the general public (who cannot recover VAT) you have immediately made yourself 20% more expensive to the public than a non registered business. If your customers are VAT registered businesses, this is not an issue as they can reclaim the VAT.
Your business may be seen as being more creditable, a ‘real business’, to customers and suppliers. The disadvantages are you will have VAT returns to prepare every quarter and also HMRC will have the right to inspect your books and records for VAT purposes which can be time consuming and stressful.
Yes, there is the standard way of doing things called invoice accounting, where you will prepare your returns on the basis of your output VAT, i.e. the VAT that has been charged on invoices raised, and input VAT, based on bills received from suppliers.
Other schemes are available such as cash accounting. This is useful if your customers pay late as it avoids you having to pay the VAT over to HMRC before you have received your money.
The Flat Rate Scheme, is another scheme which is particularly attractive to Freelancers and Contractors. It is only applicable to businesses making sales of less that £150,000 per annum.
You still charge your customer output VAT at the applicable rate, but you do not claim VAT on your expenses. Instead you pay HMRC a reduced percentage based on your occupation i.e. a Management Consultant would pay at 14%. This often saves Freelancers and Contractors significant sums over a year.
There are pitfalls that the unwary can be caught by, and using the Flat Rate Scheme could potentially cost your business money as opposed to saving it money.
Always discuss your VAT situation with your accountant before registering for VAT or applying for a specific scheme.
Freelancer Accounting can provide specialist advice on VAT according to your circumstances.
Freelancer Accounting is a specialist provider of fixed fee accountancy services to freelancers and contractors in London and the South East of England.
We understand that tax is complicated and are happy to offer you face to face meetings at one of our office locations convenient to you.
You will have your own dedicated accountant as a point of contact.
We are accredited by the Professional Contractors Group (PCG) and are an ACCA Practice, so you will never have to worry about you tax and accounting affairs again.