Categorized | flat rate vat scheme, VAT

What all freelance contractors should know about VAT

What all freelance contractors should know about VAT
Value Added Tax is a tax levied on the supply of goods and services. It is applied at each stage of the supply chain. There are several rates, which are set annually in the budget, ranging from the main headline rate (15% at the time of writing but returning to 17.5% in January 2010) down to zero. Some goods, such as food and children’s clothing, are exempt.
You are obliged to register for VAT if your gross turnover from all sources exceeds a set amount in a trading year (at the time of writing, this is £68,000). Even if you don’t meet that threshold, it is usually advantageous for a contractor to register for VAT since it allows you to reclaim the VAT you will have paid out on your own company purchases.
Once registered you are obliged to charge VAT on all invoices you raise. At set intervals, usually quarterly, you submit a VAT100 form to HMRC declaring what VAT you have charged out to clients (your output VAT) and what you have paid yourself on purchases (your input VAT). If output exceeds input you pay that amount, if input exceeds output HMRC will reimburse the balance.
It is very important to remember that VAT is not your company’s money and does not form part of your gross income. In effect, you are collecting it for HMRC and holding it until it is due to be paid over. Non-payment of VAT is serious and penalties accordingly severe
Registration for VAT can take a while to come though. You cannot charge VAT until you have your registration number, but you can mark your invoices “VAT Registration applied for”. When you eventually get your number, you can then invoice your clients for the VAT due on those previous invoices.
To be legal, a VAT invoice must contain your registration number and the Tax Point, which is the point in time at which the VAT is applied. Most contractors will be supplying a continuing service, so the Tax Point is the date of the invoice, but if you are selling goods, it is the date the goods are delivered. The Tax Point is important, primarily when the prevailing rate of VAT changes for any reason. If your invoicing period crosses the date of a change in VAT, you should ensure the correct rate is applied; the easy way is to raise two invoices using the before and after rates.
Finally, HMRC operate a Flat Rate VAT scheme, which is useful for many small contractors. The scheme has some interesting side effects and is discussed separately

Value Added Tax is a tax levied on the supply of goods and services. It is applied at each stage of the supply chain. There are several rates, which are set annually in the budget, ranging from the main headline rate (15% at the time of writing but returning to 17.5% in January 2010) down to zero. Some goods, such as food and children’s clothing, are exempt.

You are obliged to register for VAT if your gross turnover from all sources exceeds a set amount in a trading year (at the time of writing, this is £68,000). Even if you don’t meet that threshold, it is usually advantageous for a contractor to register for VAT since it allows you to reclaim the VAT you will have paid out on your own company purchases.

Once registered you are obliged to charge VAT on all invoices you raise. At set intervals, usually quarterly, you submit a VAT100 form to HMRC declaring what VAT you have charged out to clients (your output VAT) and what you have paid yourself on purchases (your input VAT). If output exceeds input you pay that amount, if input exceeds output HMRC will reimburse the balance.

It is very important to remember that VAT is not your company’s money and does not form part of your gross income. In effect, you are collecting it for HMRC and holding it until it is due to be paid over. Non-payment of VAT is serious and penalties accordingly severe

Registration for VAT can take a while to come though. You cannot charge VAT until you have your registration number, but you can mark your invoices “VAT Registration applied for”. When you eventually get your number, you can then invoice your clients for the VAT due on those previous invoices.

To be legal, a VAT invoice must contain your registration number and the Tax Point, which is the point in time at which the VAT is applied. Most contractors will be supplying a continuing service, so the Tax Point is the date of the invoice, but if you are selling goods, it is the date the goods are delivered. The Tax Point is important, primarily when the prevailing rate of VAT changes for any reason. If your invoicing period crosses the date of a change in VAT, you should ensure the correct rate is applied; the easy way is to raise two invoices using the before and after rates.

Finally, HMRC operate a Flat Rate VAT scheme, which is useful for many small contractors. The scheme has some interesting side effects and is discussed separately

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