VAT registration
Value added tax is charged on the supply of most goods and services in the course of business by registered taxable persons and, in principle, payment is made to HMRC every three months of the excess of VAT on sales invoices over VAT on purchase invoices. When your client’s annual taxable turnover (the fees and expenses they invoice to their clients) reach a set annual limit they are obliged to register for VAT. However they may also register on a voluntary basis even if their turnover is not that high, and by doing so they are entitled to reclaim VAT on many of their purchases.
Your client will not be able to register for VAT until their company has been incorporated, they have a company bank account and have started their first assignment.
The HMRC website has full details of the registration process
VAT standard scheme
With the standard VAT accounting scheme you identify the VAT on each sale, and record the value and VAT separately. You total the values and the VAT, referred to as output tax. The VAT and value of purchases are recorded and totalled in the same way, and the VAT on purchases is referred to as input tax. Total input tax is set off against total output tax and any excess of input tax is reclaimed from HMRC, while any excess of output tax has to be paid to HMRC.
VAT flat rate scheme (FRS)
The VAT flat rate scheme (FRS) was introduced with the aim of simplifying the way small businesses account for VAT so that they spend less time and money keeping conventional VAT records. The scheme is open to companies with an annual turnover (excluding VAT) of £150,000 or less, but you cannot use it unless you have registered for VAT with HMRC and have had your flat rate agreed.
Under FRS you add standard-rate VAT in the normal way to your sales invoices, i.e. the fees and expenses you invoice to your clients, but when accounting to HMRC each quarter you apply a fixed percentage to the gross turnover (total sales plus VAT) to arrive at the amount of VAT payable to HMRC. For example:
If your agreed flat rate is 12.5%, and you bill a client fees of £10,000 plus £1,750 VAT, the VAT payable is £11,750 x 12.5% = £1,468.75. This is £281.25 less than the output VAT you would pay under the standard scheme, but you cannot set off against it any input (purchase) VAT. The exception to this rule is if you buy a capital asset where the invoice value is £2,000 or more including VAT. This means that, if you normally have a high level of input VAT (purchases), you may not pay less VAT under the FRS.
Typical rates for consultancy sectors are:
- 12.5% Management consultancy (includes financial consultancy, business consultancy and public relations)
- 13% Computer and IT consultancy
- 10.5% Business services not listed elsewhere (includes interim management, research and development, technical testing & analysis and more)