Freelancers’ Questions: Would my freelance business be better off VAT-registered?
I work as a freelance interpreter in Northern Ireland where my turnover is about £6,000 a year. My tax-savvy brother-in-law has advised me that it would be beneficial for me to register for VAT.
But invoices I usually receive for the service provided are in the form of remittance advice notes with just fixed payments for certain clients (‘PSN1-£22 per hour’ etc). They do not mention any VAT. On the other hand, I have expenses related to my job, such as office accessories, which can be proved by VAT receipts. So should I still register and would it be advantageous?
Your turnover is much less than the £85,000 per annum above which you must register for VAT, but you may choose to register for VAT voluntarily. If you do then you must charge VAT at 20% (since January 4th 2011). You may also claim the VAT on your inputs (expenses) if these carry VAT.
So if you buy a laptop for £499, and the VAT has been charged by the computer supplier at the prevailing rate, which is currently 20%, then you can offset the VAT on their purchase, the input tax, against any VAT that you have charged your clients -- the output tax.
If you charge VAT, then you need to present your clients with an invoice 20% greater than now. If your client is VAT-registered, this may make no difference to them. If not, this will represent a hike in your costs they pay to you, and this may affect how they view and do business with you.
On the input side, you are correct in that you will be able to claim the VAT charged on your inputs, provided that you have kept the VAT invoices and that you meet the requirements of HMRC mainly that:
-- You cannot reclaim VAT using an invalid invoice, proforma invoice, statement or delivery note.
In addition, please note that you must usually submit a VAT Return to HM Revenue and Customs (HMRC) every three months. This period of time is known as your ‘accounting period.’
The VAT Return records things for the accounting period like:
- your total sales and purchases
- the amount of VAT you owe
- the amount of VAT you can reclaim
- what your VAT refund from HMRC is
Also note, you must submit a VAT Return even if you have no VAT to pay or reclaim.
Next, you have to submit the final VAT Return when you cancel your VAT registration.
And you must submit your return online unless:
- your business is subject to an insolvency procedure (if you have a Company Voluntary Arrangement or an Individual Voluntary Arrangement you can submit your return online if you want to)
- you object to using computers on religious grounds
- you cannot file online because of your age, a disability or because of where you live, for example, you do not have internet access
Lastly, I suggest that you need to make your VAT registration decision based on whether the effect of charging VAT on your services to your clients will offset the VAT that you can claim on your inputs, and if the bureaucracy is worthwhile to you or not. Only you can decide – not your brother-in-law as helpful as he may be -- based on who your clients are, and whether the amount of VAT you incur on purchases is significant enough to justify a quarterly return. Good luck!
The expert was Kevin Austin, chief executive of accounting firm and overseas tax-compliance advisory Access Financial.
12th September 2019