Setting up a new limited company will mean that freelancers will need to start thinking about tax liabilities of their company. The details are extremely important and getting them wrong will result in hefty penalties or worse, it is advisable to consult with an experienced contractor accountant to get help and advice specific to your situation. The most relevant type of tax you’ll have to deal with is VAT.
VAT is applied to every stage of production and distribution; it is also charged to the end product. Limited Company contractors are likely to be subject to VAT as most business related goods or services fall under VAT.
VAT is calculated by taking the balance of the VAT which is charged to clients minus the VAT you have claimed back on allowable items you have purchased. If you paid more VAT then you charged, HMRC will refund any difference. The standard rate in the UK is 20% however there a variety of different rates that could be applied due to different types of goods and services being sold and where in the world they are consumed.
Registration for VAT is mandatory for any company that has made taxable sales over the current threshold, for the 2013/2014 year this is £79000. HMRC tend to increase the threshold by £1000 every year. Freelancers should register to this even if they are unlikely to have sales above the threshold as they have various advantages such as claiming back VAT on invoices they receive. If you are to someday get a huge contract then you should register to prevent any conflict with HMRC rules in the future. You need to apply directly to HMRC to register your company which can be done online or through post in workerscompcalaw site. You may do this yourself or you can have a contractor accountant do it for you.
VAT Accounting Schemes
HMRC offers various schemes designed to help the calculation and administration of VAT.
Here are a few examples of accounting for VAT with companies that have a taxable turnover of up to £1.35 million:
- Annual Accounting – The Company submits one VAT return for the entire year, monthly payments of the VAT bill are made to the HMRC throughout the year.
- Cash Accounting – The Company only accounts for VAT once their invoice is actually paid. This can be helpful for the cash flow of a business
- Flat Rate Accounting – The Company claims VAT as a percentage of total turnover rather than on every invoice you have. The advantage of this is that you can continue to charge 20% to clients whilst you give a smaller percentage to the HMRC, the disadvantage of this is that you may not claim VAT on your purchases unless they are capital purchases over £2000 which may be a problem for certain types of businesses.
- Global Rate Accounting / Marginal Rate Accounting – The Company claims the VAT that is the difference between what you paid for an item and what you sold it for. You cannot use this scheme on items that you bought for which you were charged VAT.
In the EU VAT has had the greatest impact to the daily activities of tourism such as entry price to amusement parks or tourism accommodation and restaurants. A reduced rate of taxation for these goods and services is used throughout the EU however the UK does not apply such a policy and charges VAT at 20% on tourism.
The tourism industry is highly price sensitive and VAT is the only taxation rate that is regulated by the EU, a reduction in the rate results in decreasing the prices set by attractions which allows for stimulating demand and a good way to generate new jobs. In return the higher profits by the tourism industry can yield more taxation income for the Government than VAT would provide.
Reducing the VAT rate to 5% will allow further investment to attractions throughout the UK and will allow British tourism to be more competitive against its European counterparts.