Freelancers' Questions: Should I register for VAT?

Freelancer’s Question:

I’m not VAT-registered so I'm new to VAT (Value Added Tax) and theissues that come with. But I have been asked to do some branding for a local company for which they have approved the cost of the design/concept. The print production for cards, letterheads compliment slips etc will say, cost me £5,000 to produce. However, add in the payable VAT and it will probably come in at, say, £6,000. So how do I charge and state this on my invoice to the client if I’m not VAT-registered? Or would it be easier if I just registered for VAT instead?

Expert’s Answer:

The most important thing to take away is that if you are a freelancer that is running a business that is not VAT registered then you must not charge or state VAT on any invoice you issue. You can seek guidance from the HMRC, who make it this point very clear.

However, you should not be ‘out of pocket’ for this amount, as assuming you did not quote £5,000 for the work, you can invoice the client for the full £6,000, as the total cost of the work completed.

Have you already given the quote of £5,000? If you have, then you have two directions you can take; you could either take on the costs yourself and think of it as a learning curve and experience or you can go back to the client and explain the situation to them. After explaining the costs to the client, you can then negotiate a new sum for your services. In the future, it will be worth researching all the costs involved before making any quotes to clients. This will save you the hassle and the stress of renegotiating costs after you have already agreed to a price.

However, keep in mind that if you voluntarily register for VAT, it can have some benefits. The VAT threshold currently for the tax year 2019/20 is £85000. So if you're business sales exceed this amount then you have to be registered, however, you can register even if your sales are below that amount. If you are considering registering your freelance business for VAT, then its best to seek help and guidance from a freelancer accountant that can direct you.

From looking at your particular case, you would be able to reclaim the VAT forthe £1,000 which would be your main benefit. Generally, as a rule, you can reclaim VAT on the products you have purchased for your business, for up to fours years before registering your freelancer business for VAT. However, this rules assumes that the products purchased were purchased by you, and they are VAT-able for business purposes. Another thing to keep in mind is that the purchased goods still have to be in your possession. For example, a laptop that you still use for your business.

If you have purchased goods for your business, that you no longer have, that you have completely used up you are not able to reclaim VAT on them. For example, if you use petrol and electricity for your business, whilst travelling and in your home office - you would not be able to claim VAT even though they were a business expense. Therefore, this is something to keep in mind if you are thinking about registering your business for VAT in the upcoming four years. There are also some other exemptions to claiming VAT and this is if you have already sold or supplied the products, or if the productsrelate to VAT exempt supplies.

You will have to add in extra dates in your diary when you have registered your freelance business for VAT. You must submit VATreturns at regular intervals, and make any payments due. When you register your business for VAT, you have to start keeping all the records ofpurchases made as well as any VAT invoices that you have issued.

It might make more sense for your freelance business not to be VAT registered, as sometimes it can be beneficial to do so if you are not exceeding the threshold, especially if all the requirements above seem like they made take too much of your time and effort, with little benefit. Make sure to carry out sufficient research before giving a client a quote so you will not be underpricing your services. Depending on your business situation, if you think you will be at the threshold for VAT regsiteration then it might be worth voluntarily registering your business for VAT.

For this freelancer question, the expert isAlasdair McGill, managing director of Freelance World, an accountancy firm specialising in tax services to freelancers and the self-employed.

More on the basics of VAT and the tax rates and allowances for freelancers for 2019/20.