How Does VAT Work for a Limited Company?
Once registered for VAT, your limited company is responsible for managing VAT on both sales (output VAT) and purchases (input VAT). Here’s how it works:
Output VAT
When your business sells goods or services, you must charge VAT to your customers. The standard rate of VAT in the UK is 20% for most goods and services. However, there are reduced rates (5% or 0%) for certain goods and services, such as home energy or children’s clothing.
For example, if you sell a product for £100, the output VAT would be £20, making the total price your customer would pay £120.
Input VAT
Your business will also pay VAT on the goods and services it purchases from suppliers. This is known as input VAT. You can reclaim the VAT you’ve paid on business-related expenses, such as materials, stock, office supplies, and other goods or services necessary for your operations.
For example, if you buy materials worth £50 and the VAT charged is £10, you can reclaim this £10 from HMRC.
Paying or Reclaiming VAT
You must calculate the difference between the output VAT you’ve collected from customers and the input VAT you’ve paid to suppliers. If your output VAT exceeds your input VAT, you must pay the difference to HMRC. Conversely, if your input VAT exceeds your output VAT, you can claim a refund from HMRC.
Most businesses will pay VAT on a quarterly or annual basis, depending on the size of the business and the VAT scheme used.
VAT Schemes for Limited Companies
There are several VAT schemes available to limited companies, which can help simplify the VAT process, especially for small businesses. The most common VAT schemes include:
Standard VAT Scheme
Under the standard VAT scheme, you will charge VAT on your sales at the standard rate (currently 20%) and reclaim VAT on your business purchases. You need to file VAT returns to HMRC quarterly or annually.
Flat Rate VAT Scheme
The Flat Rate VAT Scheme is designed for small businesses with an annual taxable turnover of £150,000 or less. With this scheme, your business pays VAT to HMRC at a flat rate based on the type of business you operate. This means you don’t have to calculate VAT on each sale and purchase individually, which can save time.
However, you cannot reclaim input VAT on most purchases under this scheme (except for capital assets over £2,000). The flat rate is typically between 4% and 14.5%, depending on your business type.
Annual Accounting Scheme
The Annual Accounting Scheme allows businesses with a taxable turnover of up to £1.35 million to submit only one VAT return per year rather than quarterly. You pay VAT in instalments throughout the year, and at the end of the year, a final payment is made to HMRC.
Cash Accounting Scheme
With the Cash Accounting Scheme, you pay VAT to HMRC only when you have received payment from your customers. This scheme is available to businesses with a taxable turnover of up to £1.35 million. This can help improve cash flow as you’re not required to pay VAT on sales until you receive payment.
Final Thoughts on Limited Company VAT
As a limited company, understanding and managing VAT is crucial to staying compliant with UK tax laws. You must register for VAT if your taxable turnover exceeds the VAT threshold of £90,000, or if you want to voluntarily register to reclaim VAT on your business expenses. By choosing the right VAT scheme, you can streamline your VAT management and ensure you’re paying the correct amount.
Whether you’re just starting out or already running a successful business, staying on top of VAT will help you save money and ensure your business’s financial health.
Need help with VAT registration or managing your VAT returns? Our expert team is here to guide you through every step of the process. Contact us today for advice and assistance.
