Updated on May 15, 2022
Even if their annual VAT sales volume is less than £79,000 (the 2013/14 amount) or if they provide services that are not subject to VAT, limited company contractors can elect to be VAT registered. In order to be registered, a company does not need to make more than a certain amount of money. And each contractor has to balance the benefits and drawbacks of doing so.
More competitive hourly and daily rates for specific industries, for those in the financial and non-profit sectors, can be achieved by not being registered for VAT purposes. It’s possible that some clients will view contractors who don’t register as being too tiny to do business with since they can’t claim the VAT they paid on their overhead and expenditures.
Administration advantages to remaining non-VAT registered
Any contractor limited company that makes more than the VAT threshold is required to register for VAT. Even though they don’t make enough money to be subject to VAT, the vast majority of contractor limited companies nonetheless choose to register for VAT under the flat rate system.
Non-registration, on the other hand, has some benefits for contracting businesses. Firstly, there will be less need for administration. In order to be VAT-registered, a firm must charge VAT to customers, show its VAT number on all invoices, keep track of all VAT-related bills and receipts, and file a VAT return on a quarterly or annual basis.
Companies that are not VAT-registered are exempt from registering for VAT, obtaining VAT receipts for costs, or filing VAT reports. Non-VAT registered contracting businesses, on the other hand, must keep complete records of invoices and expenses.
Targeting non-VAT registered clients
Contractors who specialise in serving clients in the financial or charitable sectors may also benefit from lower prices. Some businesses are unable to register for VAT, which means that they pay 20% more for a contractor who is VAT registered than for one who is non-VAT registered. Non-VAT registered contractor limited firms can save a lot of money for charities and other non-profits.
Complex billing structures are used by many of the organisations affected by the VAT registration issue. Contractors may have a VAT advantage, but others may have commercial arms or other group entities.
Treatment of invoices when not VAT registered
Contractors’ day fees are all they include in their client invoices. A contractor who makes £250 a day and works 22 days a month will bill their client for $5,500.
Contractors who specialise in serving clients in the financial or charitable sectors may also benefit from lower prices.
The client would have had to pay an additional 20% of £5,550, or £1,200, in VAT. A non-VAT registered contractor could be employed full-time by a charity because of the savings it would accrue over the course of a year.
Processing expenses when non-VAT registered
The contractor’s company normally pays the gross cost including VAT for common contractor business expenses such as computers, broadband, mobile phones, travel, and subsistence. Most expenses, except for certain travel and sustenance, will be subject to VAT.
For VAT registered contractor limited companies, if they file a quarterly return, they would calculate the amount of tax they owe HMRC and subtract this amount from the amount they owe HMRC.
VAT cannot be claimed by a non-VAT registered entity on expenses. Consequently, the contractor’s organisation will pay £299 for a laptop, which includes VAT. Also, this is the sum that will appear in the limited company’s financial statements and will be deducted from the company’s profits (ie corporation tax relief).
Examples of VAT registered versus non-VAT registered
So, for example, if a contractor shelled out £299 for a work laptop from their own pocket, they would be responsible for paying VAT. The £299 would be refunded to the contractor via an expense form submitted to their own company by the latter, who would then reimburse the contractor directly.
At the end of the year, the company would record the entire £299 as an expense on its books and in its corporate tax return. So-called “invisible” VAT would be preserved.
For VAT-registered companies, the 20% that is included in the price of VAT-rated expenses, the amount of VAT contained in the price, can be reclaimed from VAT charged to customers.
An example of a contractor’s basic quarterly firm expenses is shown in the table below. An estimated £299 laptop and £30 monthly broadband and mobile phone fees are presumed to have been purchased by the contractor.
|Expense||Non-VAT registered contractor||VAT registered contractor (less 20%)|
|Cost to company||£779.00||£623.20|
Since the contractor takes a non-VAT rated train to the client’s site and pays £5 a day for lunch and gets VAT receipts for each meal, he or she ends up paying £300 (£100 per month for 20 lunchtime meals) in subsistence expenses that include VAT.
In this comparison, VAT registered contractors may be able to save money each month by claiming their VAT. In actuality, VAT savings can be more substantial because the above costs are rather low.
Making a company appear larger than it is
According to some clients, businesses with revenues under the VAT threshold are too small to do business with. Irrational yet nevertheless prevalent is the notion that VAT registration means the business is more than one person and not a sole proprietorship.
In most cases, the financial and’marketing’ advantages of VAT registration outweigh the disadvantages of non-registration, especially for those that use the tax on their services.
HMRC’s flat rate scheme.