Many businesses ask the question ‘Does a Limited Company have to be VAT registered?’ The simple answer is no; not until the threshold has been reached, but there are certain circumstances where it may be beneficial for your business to do so. In this article, we will explore when and why you should or shouldn’t register for VAT as a Limited Company.
What is a Limited Company?
A limited company is a type of business entity in the United Kingdom. Limited companies have many features in common with other types of businesses, such as sole proprietorships and partnerships.
However, there are some key differences.
One key difference is that limited companies must be registered with Companies House, the UK’s registrar of companies.
Another key difference is that limited companies must have at least one director and one shareholder.
The most notable advantage of operating as a limited company is that limited liability protection is afforded to the shareholders. This means that if the company gets into financial difficulty, the shareholders will not be held personally liable for the company’s debts.
What is VAT?
Value Added Tax (VAT) is a consumption tax levied on goods and services sold in the European Union (EU). VAT is charged at each stage of the production and distribution process, from the manufacture of goods to their sale to the consumer.
The end consumer bears the brunt of the tax, as VAT is included in the price of goods and services.
VAT registration is not mandatory for all businesses in the EU, but businesses that exceed a certain threshold of sales are required to register for VAT.
Do I need to register for VAT?
In the United Kingdom, businesses are required to register for Value Added Tax (VAT) if they exceed a certain threshold of turnover. This threshold is currently £85,000 per year. However, businesses can choose to register for VAT even if they are below this threshold.
There are several benefits to VAT registration, even for small businesses.
First, it allows businesses to recover VAT on their purchases. Secondly, it can help businesses manage their cash flow more effectively.
However, there are also some drawbacks to VAT registration. Businesses must charge Value Added Tax on their sales, which can increase prices and make them less competitive.
Businesses must also maintain accurate records to support their VAT returns.
Whether or not your limited company will need to register for VAT will be dependent on a number of factors. Such as the nature of your business and what industry it operates in.
You will also need to make the decision of what VAT scheme is right for you. Again this is dependent on what items your business sells and what scheme will be most beneficial for your cash flow.
Different VAT Schemes
There are a number of different types of VAT schemes that a limited company can register for. Which one it chooses will often depend on its circumstances and the nature of the business itself.
For example, Value Added Tax can be charged only once you receive payment for the goods or services you have provided. This is known as the ‘cash accounting’ scheme.
Some businesses may choose to opt for this scheme as it can help with cash flow problems and provide more efficient tax planning.
VAT Retail Scheme
The retail scheme allows limited companies to calculate their VAT once with each VAT return, rather than calculating it on each sale.
This helps massively for small businesses that sell a lot of low-value or small items in larger quantities.
There are 3 different types of VAT retail schemes available and depending on what industry your business is in, may also be subject to special rules.
It’s also worth noting that you cannot use the retail scheme in combination with the flat rate or margin scheme.
Annual Accounting Scheme
If your limited company’s VAT taxable turnover is £1.35 million or less, you will have the option to use the VAT annual accounting scheme.
In normal circumstances, businesses are required to submit periodic VAT returns, 4 a year to be precise.
With the annual accounting scheme, your business will only have to complete one VAT return each year.
As this can often result in a large VAT bill at the end of the year, your limited company also has the option to pay instalments towards your expected Value Added Tax bill throughout the year.
Cash Accounting Scheme
The VAT cash accounting scheme allows your business to pay VAT to HMRC when a customer has made payment, rather than when you invoice them for the corresponding goods or services.
You will be able to use this scheme if your VAT taxable turnover is £1.35 million or less.
Flat Rate Scheme
The VAT flat rate scheme is specifically available to small businesses with an annual taxable turnover of £150,000 or less (excluding VAT).
This scheme lets you calculate VAT as a percentage of your gross turnover and will depend on what industry your business is in.
VAT Margin Scheme
The margin scheme allows businesses to calculate VAT on the additional value they add to goods or services instead of the usual selling price.
For example, if you sell second-hand items the margin scheme will reduce the amount of VAT you pay on these sales.
Who does not have to register for VAT?
Limited companies under the annual VAT threshold of £85,000 (for 2022) do not need to register for VAT.
Though, they can do so voluntarily if they meet the criteria.
What happens if you are not VAT registered?
If you are not VAT registered then you will not be able to reclaim any VAT on goods and services.
VAT-registered businesses will usually offset the VAT they have been charged by suppliers against the VAT they have charged on their sales. You cannot do this if you are not registered.
Is it compulsory to be VAT registered?
If your limited company exceeds the annual Value Added Tax threshold then yes, it is compulsory to be registered for VAT.
A limited company does not have to be VAT registered providing it is below the annual threshold, but it may choose to register for VAT if it meets the requirements. Depending on how the limited company is structured and what industry it is operating in, there could be a number of benefits for them to register voluntarily, such as improved cash flow.
If a limited company is registered, it must charge VAT on its supplies of goods and services and account for VAT on its purchases.
Before you make the decision to register, or not to register for VAT, it is important that you talk things through with a professional to make sure you’re getting the most out of your business.