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Freelancing and charging VAT

Discussion in 'General Business Forum:' started by leepaulvickersdesign, Jan 19, 2011.

  1. So, I'm making the jump from 'freelancing in my spare time' to being self employed. Basic question, I know, but... Can I include VAT on my invoices without being VAT registered myself?

    I had looked into this and the earnings threshold is something like £70k so I didn't think it affected me.

    I used to invoice without VAT when I had a day job, but now I'll be owing the taxman at the end of the year I want to separate it.
     
  2. Greg

    Greg Active Member

    Hi Lee,

    I don't think you can, you would need to be VAT registered yourself to charge VAT, whilst the threshold is £70k you can still voluntarily register for VAT.

    But this would mean extra bookkeeping with VAT records, VAT invoices & submit regular VAT returns, more info about accounts for VAT registered - HM Revenue & Customs: Accounts and records for your VAT

    Greg
     
  3. Thanks Greg, I had assumed something which is wrong. I'll be using an accountant anyway so not too worried about the extra bookkeeping.

    What do the self employed DF regulars do? Is being VAT registered worth it?
     
  4. Greg

    Greg Active Member

    No probs, and I imagine you'll have some extra costs for the VAT returns and records.

    I'm a Sole Trader and not VAT registered as I do my own books/tax returns I didn't want the extra hassle of VAT returns/receipts. I would guess the main advantage is in giving a larger appearance for your business to potential clients, in addition to being able to claim back VAT on your expenditure for the business.

    Took that quote from here: I'm self-employed; should I register for VAT? | lawpack.co.uk
    Of course it's only more expensive for clients who are not VAT registered themselves, so I guess it comes down to your clients, is it likely they will be VAT registered?

    If your client is VAT registered & so are you then they can claim back the VAT they pay on your bill.
    If your client is VAT registered & you're not, it makes no difference as VAT isn't paid.
    If your client isn't VAT registered & you are, then there's an additional expense to them.
    If your client isn't VAT registered & you're not then it make's no difference.
    Think I've got that right, if it makes any sense :)

    A lot of my clients are self-employed, or small businesses, so they're not/I'm not VAT registered.
     
  5. My main worry was that any income from being self employed would be taxable - so the £200 I charge for a logo, for example, now becomes as little as £160 once the taxman gets his cut at the end of the year.

    So, to maximise my profits I charge my client VAT, who can then claim it back if VAT registered themselves...

    I'll now go read that link and get my head straight.
     
  6. Ooooh. I thought I could reclaim VAT on business purchases without being VAT registered.
     
  7. Greg

    Greg Active Member

    Your income minus expenditure gives you net profit, then subtract your income allowance (the part you pay zero tax on) usually £6,475 gives you your taxable profit.

    So, say for example you take £40,000 in sales, and have an expenditure of £15,000 that would give you a net profit of £25,000. Deduct your allowance to give £18,525 taxable income. So at 20%, around £3,705 for tax for the year, you then have NI contributions on top of that.

    Sorry if you already knew all that :)
    Greg

    EDIT: No, you have to be VAT registered to claim back the VAT and to charge VAT.
    Don't forget that the total you pay is part of your business expenditure though, so if offset against your sales for the year.
     
  8. Thanks Greg :)

    I guess I was just confused about the VAT thing - I thought it was optional <£70k, compulsory >£70k, but could be reclaimed on my purchases for the business.

    I'll go away now and do some more reading up - thanks for the links, very helpful.
     
  9. Greg

    Greg Active Member

    You can register voluntairly <£70k, but yes, compulsory >£70k.
    No probs, the HMRC site has a lot of guides and useful info.
    & I'm sure I'll be corrected if I've got something wrong myself in this thread!
     
  10. BenJonesDesign

    BenJonesDesign Active Member

    one thing that springs to mind when I first started was that its voluntary only if you think you may reach the 70k mark, you can apply of course but not sure what you have to show to become VAT registered when you won't be reaching the 70k mark
     
  11. Greg

    Greg Active Member

    I'm not sure that's true Ben, I think you can voluntarily register for VAT regardless of your projected revenue/actual revenue (as it can be backdated upto 4 years).

    VAT Registration - When should I register?
     
  12. BenJonesDesign

    BenJonesDesign Active Member

    ah right, thanks for that Greg, I too have often been puzzled at the VAT side of things, perhaps I might just have a further look at it.
     
  13. Russell

    Russell Member

    All correct from what I know Greg.

    Putting VAT on invoices without being VAT reg'd is a big no no. I'd speak to your accountant about any advantages and drawbacks. HMRC runs a half day course on VAT registering, I'm attending one next week so I will post an update if I get anything interesting out of it.
     
  14. Greg

    Greg Active Member

    No problems, and I wouldn't apply personally without an accountant/an accountants advice :)
    So definitely recommend that, and remember you can register for VAT then claim back on previous tax years, upto 4, so it might be something more beneficial down the line.

    Sounds good Russell, would be good to hear how that goes (and yes I think you'd get flagged up pretty quick by a client if you tried to add VAT but had no VAT registration number).
     
  15. Russell

    Russell Member

    Okay so I’ve been on my VAT course and here’s my sum up. Bear with me as it’s a bit lengthy.

    I think it’s wise to say it can be a bit of a minefield, if you are planning to get VAT registered I wouldn’t do it without an accountant. Yes it will cost you more in fees but it will save making expensive any mistakes.

    First thing to consider when looking at voluntary registering is your client base, are they all VAT registered? If you work mainly for large/ established companies they will be VAT registered so it’s no problem for them; you charge them VAT they claim that VAT back.

    If however a lot of your clients are new start-ups or sole traders then they often are not. If this is the case when you invoice they still have to pay the VAT but can’t claim it back. So if your quoting against other designers who aren’t VAT reg’ed it’s very likely you’re going to be the most expensive option.

    In my case 95% of my clients are VAT reg’ed and the ones who aren’t don’t put masses of work my way so I’m not going to loose sleep over it.

    The standard way of calculating VAT in and out is:
    VAT OUTPUT: This is what you charge your customers, so an invoice of £1000 would be an invoice of £1200 after adding VAT (at 20%).
    VAT INPUT: This is the VAT you pay on your expenses; printer ink, petrol, computer software etc.

    Standard VAT accounting periods are quarterly so to work this out you’d take the amount of VAT you charged minus the amount of VAT you’ve paid over a 3 month period. Depending on your expenses and invoices you would either owe the VAT man money or get a VAT refund.

    Sound simple? Unfortunately it isn’t. Whilst it’s easy to work out how much VAT you’ve charged, working out the VAT on your expenses is a different matter. For example if you buy a computer keyboard the VAT will be 20% of the total cost, but if you buy some milk for your office the VAT on that is 5%.

    Basically not all things are charged at the 20% rate of VAT. Domestic utility bills for example are charged at 5%, a train ticket is charged at 0%. There is a whole 50-60 page book on the charges related to automotive expenses. So as you can see it’s prob best to let the accountant work all that out.

    Looking at this you’re prob thinking why would anyone voluntarily register? However there is another option that makes things a little more worthwhile (if your turnover is less than £150,000) called the Flat Rate Scheme.
    Basically instead of working out all the ins and outs of your expenses and invoices you pay a % of your gross turnover. The percentages you pay varies depending on what sector you work in. The HMRC website gives only a very narrow range of sectors so nobody could tell me which one Graphic Design falls under, however after a web search I think it’s 11% (need to check this with my accountant). Also for the first year of being registered you get to knock 1% off, so this would be 10%.

    To give an example then;
    You quote a job at £2000 (+VAT) this would mean you invoice for £2400.
    You would need to pay £240 Flat rate VAT (10% of £2400)
    This means that you get to keep the extra £160!

    However you don’t get to claim any VAT back from your business expenses (unless an single item totals more that £2000) so again check with your accountant as to whether it’s worth your while.

    My accountant has mentioned about voluntary registering and this scheme to me before so I think I will go down this route when I set up my limited company. Need to get him in for a chat to verify and let me know his costs first.

    Hope for those of you still awake this has helped!
     
  16. BenJonesDesign

    BenJonesDesign Active Member

    thanks for that Russell, great help. Think I'll stick it out unregistered for a while until I've built up my client base a bit more.
     
  17. Greg

    Greg Active Member

    Useful post, thanks Russell.
    Sounds like you had a long day!! :D
     
  18. Sorry to dig this up again...

    What is common practice among non-VAT registered freelancers/small businesses when it comes to invoicing clients for print work?

    For instance, I'm arranging the production of some printed material on which VAT is chargeable. I'd like to add on my fee for looking for the best price, supplying print-ready artwork, arranging collection/delivery etc. and bill the client for my fee and printers bill combined. I wont be charging VAT (not being VAT registered), but the printer's invoice includes VAT, which the client would like to claim back (being VAT registered themselves).
     
  19. BenJonesDesign

    BenJonesDesign Active Member

    well you don't get your client to pay your printers for one which is what it sounds like your doing. Just bill your client as if it's coming from you so then you can have the full amount together in one invoice which will include your printers bill and your bill put together.
     
  20. Greg

    Greg Active Member

    Hi Lee,

    As Ben says above, I'd simply bill the client for print management, which includes the printing costs (& VAT). Unless you charge them separately for the print management services and let them pay the printer direct they won't be able to claim the VAT back, as effectively they won't be paying VAT on your invoice.

    Hope that helps,
    Greg
     

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