How do I set up a VAT Direct Debit Payment?

As a limited company director, you can pay yourself through:

1. Taking a salary

As the director of a limited company, you're also considered an employee. As such, any salary you draw will be paid through the PAYE scheme-similar to how other employees of the company will receive their pay.

You'll run a payroll, report to HMRC and receive your salary (after taxes have been deducted at source).

2. Dividends

A dividend is a payment of profit that a limited company distributes to its shareholders.

While dividends can be drawn at any frequency across the year-as long as there are sufficient distributable profits-payments are typically made on a monthly or quarterly basis.

You can cancel your VAT registration online, or by sending form VAT7 via post.

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You can reclaim VAT on the fuel portion of your mileage expenses if you don't pay a fixed rate under the Flat Rate Scheme.

You can reclaim all the VAT on fuel if you use your vehicle exclusively for business.

If your vehicle is driven for both business and personal use, you may handle VAT in the following ways:

• Reclaim all the VAT and pay the fuel scale charge for your vehicle
• Reclaim the VAT on fuel you use for business trips
• Don't reclaim any VAT. This may be the better option if you use your vehicle for business purposes on rare occasions, such that the fuel scale charge exceeds the VAT you can reclaim.

As a limited company director, there are three ways in which you can withdraw money from your company:

• Drawing a salary
• Issuing dividends
• Taking out a director's loan

The drawbacks of VAT registration are:

• Administrative burden. As a VAT-registered business, there are VAT rules and record keeping requirements you'll need to comply with.
• It makes your goods or services seem more expensive. Charging VAT can make your goods and services more expensive-and therefore less appealing, particularly if your customers or clients are not VAT-registered business, or are end consumers who aren't able to reclaim VAT.
• You may be faced with an unexpected VAT bill. If your output VAT is higher than the input VAT, as it nearly always will be, then you need to pay the difference to HMRC. This can create cash flow issues if you're unprepared for an unexpected VAT bill.
  

A contractor working through their own limited company can pay themselves through a couple of ways such as paying a salary and paying dividends. There are a few factors that need to be considered when deciding the best way to go about this.

For example, when operating inside IR35, contractors will be restricted to paying themselves a salary however when operating outside IR35 the doors are opened to maximise tax efficiencies.

The advantages of VAT registration are:

• It enhances the perception of your business: Registering for VAT tends to lend credibility to your business, and makes your company appear larger and more established.
• You can reclaim VAT: You can reclaim VAT on goods and services you've purchased from other businesses, and this can be advantageous in certain situations.
  

There are various ways to pay your VAT bill.

Online or telephone banking (Faster Payments) and CHAPS payments are processed on the same day or the next working day.

Direct Debit, Bacs payments, standing order (only for businesses using the Annual Accounting Scheme or Payments on Account), online payments (by debit or corporate credit card) or payments made at your bank or building society are processed on a three day cycle.

To pay a dividend, you need to:

• Hold a directors' meeting to ‚Äòdeclare' the dividend.
• Keep minutes of the meeting, even if you're the only director. For smaller companies, this may often be just a case of getting the paperwork completed.
• Issue dividend vouchers

There are various ways to pay your suppliers. Common payment methods include bank transfers, credit card payments and Letters of Credit.

The optimum salary for a contractor to pay themselves in the current tax year is dependent on their overall income throughout the period.

In the instance there is no other income to be considered, it is generally recommended that salary is paid in line with the Secondary National Insurance threshold which is currently £732 per month (20/21).

A director's loan is defined as money taken from your company that isn't either of the following:

• A salary, dividend or expense treatment
• Money that you've previously paid into or loaned the company
  

A Director's Loan Account (DLA) is a record of all transactions between the company and its directors. It records not just the money owed by the directors, but also the money owed to them.

Director's loans can be used:

• when you need to access money in your company-apart from what you take out as a salary, dividend or expense treatment-for personal reasons.
• for a variety of purposes, such as covering the costs of a home repair bill, travel plans or any unforeseen personal expenses that may arise.

You need to register for VAT if:

• your VAT taxable turnover exceeds the current threshold of £85,000 (for a 12-month period ending in 2020/21). The VAT taxable turnover refers to the total value of everything that you sell that isn't exempt from VAT.
• you expect your VAT taxable turnover to exceed £85,000 in the next 30-day period
• your business had a taxable turnover exceeding £85,000 over the last 12 months
  

You need to register for VAT within 30 days of fulfilling any of these conditions.

During the time between submitting your application and waiting for your VAT registration number, you won't be able to issue VAT invoices or to show VAT as a line item on your invoices.

To get around this issue, you can include VAT in the invoice total amount-without indicating VAT as a line item or showing it in your invoice. For instance, if you're charging a client £100 for a service rendered, you'll invoice the client for £120 to account for the standard rate VAT of 20%.

When you've received your VAT registration number, you can then reissue the invoice for £100 (and include £20 VAT as a line item).

There are three VAT rates: standard rate (20%), reduced rate (5%) and zero rate (0%). VAT is not charged for exempt or out of scope items, and the standard rate applies to most goods and services. Refer to HMRC's resource for further information on what VAT you should charge based on the type of goods or services you provide.

You can pay an independent contractor by an hourly or daily rate, or by the project through the contractor's preferred payment method. You won't need to withhold taxes, as they are responsible for paying their own income and National Insurance contributions.

Whether or not VAT should be charged on your sales to your overseas clients all depends on what HMRC refers to as the place of supply of your services.

Generally, if your client is a business customer, the place of supply will be where the client is based but if they are a non-business customer, the place of supply will be where you are based.

For most contractors, this means that your place of supply is generally where your customer is based.

If your place of supply is in another EU country, you do not need to charge UK VAT - providing they are a registered business in their country. You will need to request their VAT registration number and display this on your invoices. It will also need to be reported to HMRC within your VAT return and a separate EC sales list.

If your place of supply is in a country other than the EU then you do not need to charge VAT as it is outside the scope of VAT entirely. No further actions are needed for this other than not including VAT on your invoices.

If you are looking to check if you need to charge VAT or need assistance with any other VAT matters, contact one of our VAT experts today.

• What is PAYE
• PAYE when self employed
• When to register for PAYE
• Sole trader taxes
• Sole trader income tax calculations
• Limited company dividends & salary
• Dividend tax rates

There are instances whereby VAT registration is mandatory, such as when your VAT taxable turnover exceeds the current threshold of £85,000. If you're not legally required to register for VAT, you'll then need to weigh out the benefits (enhances image, reclaim VAT) against the downsides (administrative burden, unexpected VAT bills).