When should I register my contractor limited company for VAT?

When should I register my contractor limited company for VAT?
Choose a Name: The name has to be unique, obviously, and not likely to be confused for someone else’s existing name. The best reference point is the Companies House website – www.companieshouse.gov.uk – which has a simple search facility so you can check your chosen version. Also, try to avoid names that are specifically related to your line of work, just in case you want to change careers later: imagine selling cars though a company called Al’s Bakery.
Decide on Share Ownership: Is this just you, or you and your spouse, or you and two or three other people? This is important, because it defines how to allocate the Ordinary Shares In the company. Dividends are paid in direct proportion to numbers of shares held. A husband and wife typically have 50% each, for example, but if one is already earning money, be aware of the impact of the share income on their tax position. Share allocation can be changed after the event. There are several variations on share management; but for anything other than a simple allocation of ordinary shares, get expert advice.
Register at Companies House: There is an online system you use to set up your company and pay the registration fee. It is fairly simple to use. One question it will ask is who the directors are. For a typical small contractor company you only need one but there’s no reason not to have more. Although not strictly necessary any more, it also helps to nominate a Company Secretary: this could be the same person, but it’s more sensible to have someone else, a partner or relative for example.
Register a Memorandum of Association: Something else to do while you are at Companies House. At its simplest this is a document describing what your company is for and how you wish to run it. You can do it yourself, but the document can have legal implications in a tax investigation so do some online research for a suitable template from sites such as www.simply-docs.co.uk or www.clickdocs.co.uk.
Set up a Bank Account: This has to be a business bank account. Banks are increasingly wary of new business accounts, so you will have to answer some detailed questions and it will help if you have some professional references and a signed contact to demonstrate you actually will have an income.
Register for VAT: You have to do this if your annual income is in excess of a set amount (currently £67,000 pa) but it Is advantageous to register anyway. VAT and the Flat Rate Scheme are discussed in more detail elsewhere.
And that’s it. It sounds complicated but is in fact quite straightforward. You can also take the easy way out; either use a company formation agent, or there are several accountants who specialise in contractors who will set up all if the above for you for a small fee, or even for free, as well as providing expert support. Finally keep track of all your various expenses setting the company up, since you can reclaim these once you start trading.

It is a legal requirement that if you are trading as a business you have to register for VAT as soon as your turnover exceeds £68,000 (from 2009 – the threshold is periodically reviewed). This is based on turnover in any given trading year, not your profit; as soon as you have raised invoices in excess of the threshold you must register.

You can register before you reach this level or even if you never reach it. The only requirement for registration is that you are actually trading (or are about to). As long as you can produce invoices or a signed contract to deliver work, you will qualify.

You must of course be registered for VAT before you can apply to move on to the Flat Rate scheme.

The advantage of registering is that you can then reclaim any VAT you have spent out in the course of your business. So the VAT element of any equipment you have bought or expenses you have incurred can be recovered. In practice you offset it against the VAT you have charged to your customers and remit the balance to HMRC.

Remember that once you have registered for VAT you have to charge it at the prevailing rate on any invoices you raise from that point on. If your clients are VAT registered themselves this is not an issue, since they can recover VAT the same way that you can. However, if they are not, or are trading in a VAT-exempt industry you might need to think about the impact on them of you raising your prices by 17.5%.

You can apply to de-register at any point provided you can convince HMRC that you are going to be trading under the threshold for the foreseeable future, and you must de-register if you meet some other criteria, for example if you cease trading in VAT-liable supplies.

Finally, if you are trading through an umbrella company, you do not need to worry about VAT, since they will be the registered company and will manage the VAT element of your invoices for you.

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Image: In Search Of Lost Time by bogenfreund

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