We have produced this quick guide to VAT and how it applies to our limited company (PSC) clients.
VAT is a sales tax levied on the sale of goods and services in the UK and applicable EU countries. There are three rates of VAT:
- A standard rate – currently 20% (effective 04 Jan 2011)
- A reduced rate – currently 5%
- A zero rate
For our clients, the standard rate of 20% applies.
1: When to Register
The supply of any goods and services, which are subject to VAT at any rate are called taxable supplies whether you are VAT registered or not.
If the value of your taxable supplies is over a specific limit, you need to register for VAT (unless your supplies are wholly or mainly zero rated in which case you may apply for exemption from registration – but this doesn’t apply to our clients).
For 2025/26 the limit is £90,000. So, if your previous 12 months of trading produced a turnover of greater than £90,000, or you expect your taxable turnover to go over £90,000 in the next 30 days, you must register your company for VAT.
If your turnover is less than the specified limit you can choose to voluntarily register for VAT.
2: What it means to be registered for VAT
Once registered for VAT, you must add 20% to the value of your invoices. Invoices must meet strict requirements regarding the information they show – the online invoicing service we offer meets these requirements.
Any VAT your company pays for expenses or purchases must be recorded within the No Worries expenses section of your online account as the figures appear on your receipts.
Each quarter (every 3 months), we prepare your company VAT return. We add up all the VAT collected from your invoices, subtract any VAT your company paid (for expenses or purchases), and the difference is paid back to HMRC by your company.
The net result of VAT registration means you get back any VAT your company has paid on expenses or purchases.
3: How to Register for VAT
If you would like to register your company for VAT please contact us. We will email you out a brief questionnaire, and after receiving the answers back from you, we will complete your company VAT application on your behalf.
Note: We do not suggest that our clients to complete their own VAT returns (unfortunately previous experience shows our clients can often prepare incorrect VAT returns, and we become a VAT help line)
The standard VAT method uses the 20% standard rate on services provided (Output VAT) and deducting from that any VAT incurred on purchases and expenses (Input VAT). Output Vat less Input VAT is accounted for to HM Revenue and Customs every three months.
With the Flat Rate Scheme, you pay VAT as a percentage of your turnover instead of working out VAT on all purchases.
Since 1 April 2017, FRS businesses must determine whether they meet the definition of a limited cost trader, and need to apply 16.5% (Instead of the normal FR%) to the VAT inclusive turnover.
Businesses using the scheme, and new businesses joining the scheme, will need to complete a simple test, using information they already hold, to work out whether they must use the new 16.5% rate. To support businesses, the government have an easy to use online tool that will help them determine whether the new rate applies to them.
What is a limited cost trader?
A limited cost trader will be defined as one whose VAT inclusive expenditure on goods is either:
- less than 2% of their VAT inclusive turnover in a prescribed accounting period
- greater than 2% of their VAT inclusive turnover but less than £1000 per annum (or £250 per quarter)
Important:
- the goods must be used exclusively for the purpose of your business
- you receive a supply of goods (including by acquisition or import) if the exclusive ownership of moveable items is passed to you from another person.
For this measure the following goods are excluded:
- vehicle costs including fuel, unless you’re operating in the transport sector using your own, or a leased vehicle
- food or drink for you or your staff
- capital expenditure goods of any value
- goods for resale, leasing, letting or hiring out if your main business activity doesn’t ordinarily consist of selling, leasing, letting or hiring out such goods
- goods that you intend to re-sell or hire out, unless selling or hiring is your main business activity
- goods for disposal as promotional items, gifts or donations
- any services
This scheme is effectively open to all our clients. The restrictions are; your annual taxable turnover subject to VAT is not more than £150,000
For companies that are NOT a limited cost business, the HMRC have assigned flat rate scheme percentages against various trade sectors. Their website contains a list of these at http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm#5.
In addition:
- if you are newly registered for VAT, you are given a 1% reduction on the trade sector percentage relevant to your operation for the first year of registration.
- if you buy a capital asset with a single invoice value, including VAT, of £2,000 or more you can claim the input tax on your VAT return in the normal way outside of the VAT flat rate calculation.
For Example
Let’s take an example for a financial consultant who would fall into category of ‘Management Consultant’ with a fixed rate of 14%, and is not a limited cost trader.
•Assume company annual revenue = £65,000;
•Flat Rate percentage = 13% (discounted 1% for the first year);
•VAT charged by the ltd company contractor = £65,000 x 20% = £13,000;
•VAT to pay to HMRC = £78,000 x 13% = £10,140;
•Difference = £2,860 (£13,000 – £10,140)
The £2,860 surplus is retained as profit by the limited company. Any VAT on expenses and purchases is not recoverable and therefore reduces the surplus. However most of our clients expend very little in VAT (perhaps £400 a year in total) – therefore nearly all of our clients will benefit from using the flat rate VAT scheme.
This surplus will reduce in the second year as the 1% reduction expires and the usual rate of 14% will apply. In the above example, the surplus would be reduced from £2,860 to £2,080.