VAT registered, pros and cons please??

[sandhu40]

I am moving to London working on a contract fitting gas meters. I will also be working on the side doing private jobs, ie weekends, and when I can evenings. I was wondering what the benefits would be in becoming VAT registered and the negatives? My contract would earn me around £1700 before tax and other expenses. I would claim business mileage allowance obviously but could I also claim back VAT on diesel on top? I understand becoming VAT registered is compulsory if you earn around £64000..? so will that apply to me if I only worked on the contract and did no private work? Also, when I did do private work I would be less competitive I guess but was wondering how many heating engineers out there do charge VAT as a %. Would I be able to get parts and materials cheaper than other guys who aren't registered because I could claim back VAT??

I am soo confused and worried. I will be paying the 40% tax rate so I don't want to lose more money by not becoming VAT registered. I am also changing vehicle soon and considering going to auction where you almost certainly pay VAT (buying van for around 4k) Just need some help whether, overall, VAT registering is a good idea for someone in my situation or not.

I will employ an accountant after a few months but until I have limited cash flow, cannot do so.

Any help would be greatly appreciated.

Thanks in advance,
AJ

 

[Shytalkz]

At less than £64k ish turnover, you have a choice whether or not to register for VAT. If you do, then for all business-related expenses you can claim the VAT back - includes fuel. If you use the van solely for work purposes (which of course you will ), then VAT back on that too.

You will, of course, have to charge punters VAT - whether that puts you out of the market, I wouldn't know, but somehow doubt it. Register on a cash accounting basis and you only pay the VAT in the quarter that you receive payment, not when you raise an invoice.

If you play the system well, the extra 17.5% can go in a savings account and get some interest for you before you have to cough up. Registering with HMRC to submit returns online and pay by DD gives you an extra week to pay them the money, which becomes due about 6 weeks after the end of your VAT quarter.

I have a separate savings account and each week punt 15% of gross income over into it to cover the VAT liability. Obviously whatever you've spent as a business expense that has VAT on it is offset, so there's normally a bit left over to go to the next quarter. comes in handy when finances are a bit pinched.

Try and buy things close to the end of each VAT quarter. That way, you're not having to stump up VAT for very long before getting it back.

It's not that complicated to do. Get some decent software (like Quickbooks) and it does it all for you, providing you keep it up to date with income and expenses.

 

[Shytalkz]

As a separate possibility, also register as a limited company, pay yourself a small salary of about £6kpa to trigger NICS, use up your tax free amount and to protect your state pension contributions (43 years' worth by the time you retire, amount not relevant, just that you've paid for that many years - such as it's worth of course); then pay a dividend to top up, keep your total salary + divi drawings under the 40% bracket and there's no employee or employer NICs to pay on that amount and no tax for you. Company pays 22% I think on profit (which divi comes from), first £10k free of tax. Saves a fortune and quite legit.

 

[sandhu40]

Many thanks..


I can claim VAT back on diesel on top of the 40p per mile allowance? I am looking to be doing around 200 miles per week. Or I could say I am commuting from Birmingham and say I am doing 1400 miles per week. AM I correct in saying that you dont need receipts for fuel if you're claiming business mileage? I was told that by a small company director. He also pays himself a dividend and a salary. He always breaks even (conveniently). What is a and how does a dividend work? Is there a maximum amount per year tax free?

 

[WoodYouLike]

Company pays 22% I think on profit (which divi comes from), first £10k free of tax. Saves a fortune and quite legit.

When you become a LTD, your company pays around 22% PAYEE and NIC total (since you and your company are one - or two-man-band). Corporation tax is calculated very differently and the 'free first £10k net profit' was skipped two years ago I'm afraid.

You're right on paying yourself as director of the Ltd a low wages, just enough to trigger the NIC. Paying yourself dividend is good form however this should never be more than the amount of the total net profit made over the year.

The most simple software program I know that gives you an almost daily/weekly insight into what amount of VAT is due - based on cash-accounting is the Rapid Cash Accounting Package - works with Excel

 

[Shytalkz]

Corporation tax is calculated very differently and the 'free first £10k net profit' was skipped two years ago I'm afraid.

You're right on paying yourself as director of the Ltd a low wages, just enough to trigger the NIC. Paying yourself dividend is good form however this should never be more than the amount of the total net profit made over the year.

I stand corrected on the corp tax - shows how closely I look at my accounts report for companies house every year!

Re divis, best way is to just take drawings, have a director loan account in your accounts software, let the accountant sort out what's PAYE/divi/expenses at the end of the year, in the most creative way that he can think of, without dragging you over the line into tax evasion land.

 

[Shytalkz]

Many thanks..


I can claim VAT back on diesel on top of the 40p per mile allowance? I am looking to be doing around 200 miles per week. Or I could say I am commuting from Birmingham and say I am doing 1400 miles per week. AM I correct in saying that you dont need receipts for fuel if you're claiming business mileage? I was told that by a small company director. He also pays himself a dividend and a salary. He always breaks even (conveniently). What is a and how does a dividend work? Is there a maximum amount per year tax free?

If the van is a business van, then you won't claim 40ppm: you can charge the client, if you so choose, whatever ppm you think is sufficient, this goes as income, offset against which is the cost of running the van (RFL, insurance, fuel servicing). Any left over goes into the pot as net income and the company pays tax on it, or you pay yourself a bit more of a divi.

You need receipts for everything that you want to claim as an expense on the part of the biz. If the biz owns the vehicle, it goes on the balance sheet as an asset, which gets written down in value every year. Can be a good way of buying something back cheap off the biz in time, as you only need to pay the company the write down value, otherwise the company makes a profit and gets taxed on it. So, you pay yourself a divi from the company to buy it, buy it off the biz and it's yours! If you are claiming that you only use the van for work purposes, make sure that you keep extremely detailed mileage records (which you should do anyway, as if there's any doubt and a lack of paperwork, the IR will always presume in their favour and you are bollicksed) - and don't stretch the miles per gallon to something stupid to cover any private mileage that you just happen to do, as they will catch you out one day. I know, my ex biz partner fell foul of that and we got stuffed for a substantial payout to IR as a result.

If the van is your own, then you claim for mileage that you do on behalf of the company (which is also you, but is a separate entity for tax and legal purposes). You do not need receipts for that, but you do need a record of your mileage. The IR rate is 40ppm for so many miles and then it reduces to 25ppm I think. With the hikes in fuel, when you take into account servicing, RFL, insurance, interest on payments etc as well, it's hard to break even on their figures.

A divi is paid from the profits that a company makes. Like if you own shares in BP or whomever, you get an annual divi payout of so much per share.

Obviously you want to pay yourself an amount each month throught the financial year, rather than a big wedge at the end of it. Hence, take drawings, leave the accountant to work out as per other post. Keep total drawings under 40% and you won't pay any personal tax on the divi; the company keeps 10% back as a tax credit. There are no employee or employer NICs on divis, which is a big saving to both you and the company.

 

[sandhu40]

Thanks so much, you've been very helpful.

Just one more question. If I paid myself a dividend, would that be completely tax free and what is there to stop me paying myself a large enough dividend so I wouldn't have to pay any 40% tax.

My earnings after expenses should be around 65000 per year. How much of this should I expect to clear after paying income tax, NI etc. Thanks.

 

[WoodYouLike]

No dividend isn't tax free really, only you as company don't pay PAYE and NI over it. The amount will be added to your personal earnings and attract normal tax - but still less than if you - your company - would pay that amount as normal wages.

My advice = find a proper accountant who can tell you much more on this, plus can give you advice on how to pay yourself as best as possible. Make sure you find one who isn't just a penny-pusher!

 

[sandhu40]

Thanks again!