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Does my PSC need to register for VAT?

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There’s no legal requirement to register for VAT until the business turnover exceeds the registration threshold (currently £67,000).

As mentioned before, this figure applies on a pro-rata basis, so if your turnover in a three month period exceeds £17,000 and is likely to continue to do so then registration is required immediately. 

Even if you are below the registration threshold it is possible to register for VAT voluntarily. Companies opt to do this if they wish to reclaim the VAT incurred on purchases and expenses, thus making them cheaper. Of course, you will incur extra paperwork by doing this.

The Flat Rate VAT Scheme

The Flat Rate Scheme was first introduced by HMRC in 2002 with the aim of simplifying VAT calculations for small businesses (and contractors). Companies charge clients at the standard VAT rates (then 17.5 per cent), but repay HMRC at a lower flat rate. For most contractors, the fixed rate payable is 13 per cent.

In essence, instead of paying HMRC the total VAT charged on invoices minus any input VAT you may reclaim, you calculate a fixed percentage of your gross turnover (say 13 per cent) and pay that amount to Customs each year.

Following the Pre-Budget Report in 2008, the fixed rate percentages used within the Flat Rate VAT Scheme have changed. You can see the new percentages in Annex E HMRC PDF document.

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