VAT
Value Added Tax is what it means…
You can only register for VAT if you are in business. By having your own psc you are in business and therefore should register it for VAT. There are 2 types of VAT; Standard Rate VAT and Flat Rate VAT. To be classed as being in business the following activities must be frequent to a degree and be continued over a period of time;
- you earn an income by carrying on a trade, vocation or profession – by being self-employed or through another entity such as a limited company
- you provide membership benefits as a club, association or similar body in return for a subscription or other form of payment
- you charge admission to a premises
- you provide certain other activities as a club or other recreational body, charity or other non-profit making body
Value Added Tax (VAT) is chargeable through your psc if it is a VAT registered company. Only once your psc is registered for VAT can you start to charge VAT when supplying your services or goods in the United Kingdom or Isle of Man.
There are 3 rates of VAT
- Standard rate 20 %
- Reduced rate 5 %
- Zero Rate 0 %
Through your limited company you can register and start charging for VAT when it reaches the VAT registration threshold of £73,000, or if you know that within the next 30 days it will go over the threshold. You do have the choice of still registering for VAT if your taxable turnover does not meet the threshold of £73,000 however once this amount is reached it is mandatory to be VAT registered.
The advantage of being VAT registered is that even if you have not paid for goods that your psc has purchased, you can still reclaim the VAT from HMRC in the quarterly VAT return, giving you more of a cash flow to play with.
Why should I register for VAT?
Why would you not want to? The Flat Rate Scheme (FRS) for VAT is designed to simplify VAT for small business. Through the FRS your psc can pay VAT as percentage of its gross turnover instead of having to work it out on all sales and purchases. For more information on FRS, click here.
What is input tax?
This is the VAT which you have been charged by suppliers on goods or expenses that your business has incurred during the relevant quarter. Again, whether or not you have paid for the goods or expenses you must add this to your VAT return form in that quarter.
What is output tax?
This is the VAT which you have charged to customers/clients on your invoices in the relevant quarter. Whether you have or have not received payment for the goods/services provided, you still must add this to your VAT return form in that quarter.
