Value added tax (VAT) refers to a levy automatically added to the bill of a product or service, with the figure based on all imposed fees from production to distribution, including all materials used and any increase to what the product or service is worth at the point of purchase.

As with any type of tax, HMRC controls VAT, and it must be sent the appropriate amount of VAT from qualifying companies every quarter. New business owners that are finding their feet could be unaware of whether or not their company will owe a quarterly VAT sum to HMRC. In the case of limited companies, it’s not as simple as a straight yes or no answer.

Do all limited companies have to be VAT registered?

In some cases, VAT registration can be a choice for limited companies, but it entirely depends on the total income over any given quarter. Many people wrongly assume that sole traders and limited companies are treated differently by HMRC when it comes to VAT, but there’s actually a threshold set at £85,0000 (as of 1st April 2019), and any sole trader or limited company earning above the VAT threshold over the previous 12 months will have no choice but to register for VAT.

If a limited company falls below the threshold, it’s not necessary to register for quarterly VAT payments. However, business owners of limited companies can choose to pay value added tax even if they don’t need to. It could be seen as peculiar to do this if it’s not required, but there are some benefits such as potentially appearing more professional.

Most products and services face a 20 per cent rate, with an additional five per cent applied to energy, heating and health services. As an example of how VAT works for shops and customers, if a shop sold something for £10, they would owe £2 to HMRC in VAT, which they could end up claiming back later if they don’t exceed the VAT threshold. For the customer, the VAT would be included in the £10 price for the product and they wouldn’t be given the option to get it back.

VAT schemes come in a number of forms. The most basic version is the ‘standard scheme’, where input and output is given to HMRC at the 20 per cent rate. Smaller businesses often rely on the ‘cash accounting scheme’, which is used for individual payments instead of looking at putting everything through HMRC on a quarterly basis. The third and final option is the ‘flat rate scheme’, where VAT payments are simplified to companies expected to achieve a turnover of £150,000 or less in the next 12 months. No costs can be reclaimed from HMRC, but the advantage is that you pay a flat rate on turnover each quarter while charging clients the same 20 per cent rate on invoices.

How to VAT register a limited company

As soon as a limited company surpasses the VAT threshold of £85,000 in the last 12 months, it’s the responsibility of the owner to register for one of the three VAT schemes. It’s particularly important to register a limited company to a VAT scheme if there’s a strong likelihood of turning over more than £85,000 in the next twelve months, especially if it could be achieved over the next 30 days.

HMRC have encouraged limited companies to submit VAT returns electronically through the official government website since 2012, with many companies already taking this approach since 2010. Registering online means that all information regarding VAT and proof of past payments is easy to find via the internet.

That being said, there are still many business owners who prefer to submit VAT payments traditionally, sending any outstanding fees through the post. It’s still possible to do this as long as you use a VAT1 form and send it directly to HMRC.

How companies pay VAT depends on the preference of the individual person put in charge of the task. While a larger company is likely to devote an entire department to financial transactions and company accountancy, smaller companies may be more inclined to hire an accountant to oversee all of these processes in the correct way.

Regardless of the size of the company in question, an accountant is usually used on a short-term basis merely for registering to pay VAT according to the appropriate rules and regulations. HMRC are looking to make VAT registration as easy as possible, so it’s gradually becoming more common for companies to register themselves online.