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Do limited companies need to be VAT registered?

Home / Blog Entry / Do limited companies need to be VAT registered?

Value added tax, more commonly referred to as VAT, is a levy that is added automatically to bills for products and services. The figure for this is based on the fees that are imposed from production along with distribution. This includes any and all materials as well as increases on what the service or product is worth when it gets to the point of purchase. This topic is something we have a lot of knowledge of from our work providing VAT returns in Stratford.

HMRC controls VAT like they do with any kind of tax. It is important that companies who qualify pay the right amount of VAT every quarter. A new business owner that is just starting out might be unsure on if their company will owe HMRC a quarterly VAT. However, when it comes to limited companies, the answer is not a straightforward yes or a no.

Does every limited company need to register for VAT?

VAT returns StratfordSometimes, limited companies can choose whether to register or not. However, this depends on their income over a quarter. People often assume, wrongly, that limited companies and sole traders get a different treatment from HMRC in terms of VAT. The truth of the matter is there is a threshold of £85,000 (as of April 2020). As a result, limited companies and sole traders who earn above this threshold over the 12 months beforehand will need to register for VAT.

Limited companies falling below the threshold have no need to register for quarterly VAT payments. But, they can choose to pay VAT despite not needing to. This does have some benefits, for example it looks more professional.

hat is the rate?

Many services and products have a rate of 20% and there is another 5% on health, energy, and heating services.

To offer an example of VAT in action for a shop and its customers, imagine selling something for £10. In this case they would need to pay HMRC £2 in VAT and if they fell below the threshold, they could claim this back. The customer does not have to worry about this though as VAT is part of the sale price in the UK, unlike other countries that add it afterwards.

VAT schemes take several forms

Firstly, there is the basic ‘standard scheme’ where input and output goes to HMRC at the rate of 20%.

Then, there is the ‘cash accounting scheme’ which is something that smaller businesses tend to rely on. This is for individual payments rather than putting everything through HMRC every quarter.

Finally, there is the ‘flat rate scheme’. This involves simplifying VAT payments to companies who are expected to have a turnover under £150,000 across the next 12 months. You cannot reclaim costs from HMRC however you get to pay a flat rate for turnover each quarter. This is all the while charging clients the 20% rate on invoices.

Offering support with accountancy and VAT returns in Stratford

Finance can be a difficult world to navigate. That is why many people reach out to professionals who can support them. Our work covers numerous areas from auditing to VAT returns in Stratford and further.

So, feel free to reach out to Brian G. Lonis & Co if you are looking for experts to help you with your accounting.