To VAT or not to VAT?

Posted on: June 11th, 2010

I’m based in the UK, where we currently have VAT at 17.5%. If your turnover is £70,000 or more, you have to be VAT registered. If your turnover is less than this, then it’s up to you whether you register or not.

You might well ask: what’s the point of registering for VAT if you don’t have to? After all, it’s extra paperwork and hassle isn’t it?

Here’s the reason why you should register, even if your freelance income isn’t anywhere near £70,000 a year:

  • If you buy in good and services (anything from a monthly phone bill to a computer) you will be able to claim back the 17.5% VAT these companies add to your bill. So, if you aren’t registered, every bill you pay will be 17.5% more expensive.

You can find out more about VAT from the HMRC website.

I’ve been registered for VAT right from my early days as a freelancer. Saving 17.5% on everything I buy in amounts to a fair amount over the course of a year. However, calculating the VAT element of everything and filling in my quarterly VAT return was a real pain. Luckily, the flat rate VAT scheme was introduced a few years ago. It has cut the time it takes me to do my return from 2-3 hours to 2-3 minutes.

The flat rate VAT scheme

With the flat rate scheme, I can no longer claim back the VAT on any purchases I’ve made. However it does mean that, although I still collect in VAT at the standard rate of 17.5% on my copywriting fees, I only have to  pay HMRC 10.5%. So I keep the remaining 7% for myself. If I have bought in a number of goods and services that quarter then it usually equals out. But if I haven’t made many purchases, I’m quids in. And the other great thing is saving 2-3 hours on filling in my VAT return.

You can register for the flat rate scheme if your VAT taxable turnover is less than £150,000 a year. The rate you are given depends on your job – mine is classed as ‘Business Services, Other’ so it’s 10.5%.

When NOT to register for the flat rate scheme

If you buy in a lot of goods or services (eg: you hire photographers, designers, writers etc who are VAT registered) then the flat rate scheme isn’t for you, as you won’t be able to claim back the VAT they charge you. But if, like me, you don’t buy in many services and you don’t like the hassle of VAT returns, definitely take a look at the flat rate scheme.

4 Responses to “To VAT or not to VAT?”

  1. Freelance forums
    June 11th, 2010

    We have a VAT of 19% in Romania. I am “forced” to enter that area, when my business grows some more. Of course, I can chose it now, but I’d stay away from it. I don’t have too many costs running my business, so recovering my VAT is a pain. Not to mention our state has a bad reputation, when it comes to actually returning money. So I’d better stay away for as long as I can ;)

  2. Carole
    June 12th, 2010

    Our tax office here in the UK is pretty speedy when it comes to paying up if you’re owed VAT – within a few days of sending the VAT return in is my experience.

  3. Cookies & Java
    June 23rd, 2010

    Since the budget announcement yesterday that the standard rate of VAT will be increasing to 20% in Jan I thought I’d check the HMRC site to see if there’ll be any changes to flat rate percentages.

    Interestingly enough the flat rates will be increasing no more than 1.5% despite the 2.0% rise in the standard rate. For some business types (sadly not really freelance ones) the increase is only 0.5%.

    So, if I’ve worked it out right, those registered for flat rate VAT should be a little better off in 2011 under this new budget.

  4. Carole
    June 23rd, 2010

    Ooh, that’s good news. :)

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