Contractors have two different kinds of payment structures available. These are umbrella companies and limited companies. For each there are a number of VAT issues that must be taken into account.
VAT: Value Added Tax
VAT is known as a sales tax that is added to the price of products and services. Not every product and service in the UK succumbs to VAT, such as books, but there are only a few exceptions. A VAT registered business is able to reclaim any VAT that has been paid on products and services that it buys.
Who Needs To Register?
Any business that provides goods or services that count as taxable supplies, have a legal obligation to register for VAT with Her Majesty's Revenue and Customers (HRMC). Registration must be within 30 days of reaching a turnover equal or over the current VAT threshold (£73,000 as of 1st April 2011). Within any 12 month period. This rule applies to all businesses, including limited companies, sole traders and those who are self-employed.
The option exists to voluntarily register for VAT if the turnover is below the current threshold. After registration is complete each business will be given a VAT registration certificate with the unique VAT number. This number must then be included in all future invoices.
How Does VAT Work?
VAT works by businesses paying VAT on all purchases, this is known as input tax. Then each business is able to charge VAT on all sales, known as output tax.
Input Tax - If a contractor makes a purchase and the current VAT rate is 20%. This will enable the contractor to offset the VAT on their purchase against any VAT they have charged on their output tax.
Output Tax - The output tax, VAT charged on goods and services, is currently 20% therefore this must be included to any invoice.
VAT Returns
Most contractors have to account for VAT every quarter. After receiving a VAT return, it is vital that the payments are made online no later than one month following the end of the VAT quarter.
Fortunately, for those who have accountants or an umbrella company that can take care of these VAT calculations will not have the worry or confusion that the current tax systems creates for many.
Umbrella companies are themselves VAT registered and will include the VAT to their invoices. This situation will allow for the contractors to never see VAT and very rarely be affected by it.
All contractors must remember that VAT can be very complex and all individuals and businesses are encouraged to seek professional advice.
VAT: Value Added Tax
VAT is known as a sales tax that is added to the price of products and services. Not every product and service in the UK succumbs to VAT, such as books, but there are only a few exceptions. A VAT registered business is able to reclaim any VAT that has been paid on products and services that it buys.
Who Needs To Register?
Any business that provides goods or services that count as taxable supplies, have a legal obligation to register for VAT with Her Majesty's Revenue and Customers (HRMC). Registration must be within 30 days of reaching a turnover equal or over the current VAT threshold (£73,000 as of 1st April 2011). Within any 12 month period. This rule applies to all businesses, including limited companies, sole traders and those who are self-employed.
The option exists to voluntarily register for VAT if the turnover is below the current threshold. After registration is complete each business will be given a VAT registration certificate with the unique VAT number. This number must then be included in all future invoices.
How Does VAT Work?
VAT works by businesses paying VAT on all purchases, this is known as input tax. Then each business is able to charge VAT on all sales, known as output tax.
Input Tax - If a contractor makes a purchase and the current VAT rate is 20%. This will enable the contractor to offset the VAT on their purchase against any VAT they have charged on their output tax.
Output Tax - The output tax, VAT charged on goods and services, is currently 20% therefore this must be included to any invoice.
VAT Returns
Most contractors have to account for VAT every quarter. After receiving a VAT return, it is vital that the payments are made online no later than one month following the end of the VAT quarter.
Fortunately, for those who have accountants or an umbrella company that can take care of these VAT calculations will not have the worry or confusion that the current tax systems creates for many.
Umbrella companies are themselves VAT registered and will include the VAT to their invoices. This situation will allow for the contractors to never see VAT and very rarely be affected by it.
All contractors must remember that VAT can be very complex and all individuals and businesses are encouraged to seek professional advice.
Harvey McEwan writes to offer information and advice on a variety of areas, from technology to holiday destinations. Read through Harvey's other articles here to find out more.
1 comments:
Useful post describing the basic tips for contractors guide to VAT. VAT is known as a sales tax that is added to the price of products and services. Not every product and service in the UK succumbs to VAT, such as books, but there are only a few exceptions. A VAT registered business is able to reclaim any VAT that has been paid on products and services that it buys. Thanks for sharing such useful guide for VAT.
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