Long VAT-registration delays hit freelancers and their accountants
Freelancers’ accountants are taking a dim view of HMRC taking between “six” and “several” months to register the self-employed for VAT.
Taking to social media in light of people sharing tips on what sole traders in the long queue for VAT registration should do, one tax director said self-employment was suffering.
“It's at the stage now where HMRC's service levels are an impediment to running a business in the UK,” claimed the director, Linda Skilbeck of Top 25 accountancy firm Buzzacott.
'Typically new traders don't VAT-register straight away'
Skilbeck was mainly referring to clients of freelancers being unable to recover VAT where the freelancers can’t show VAT on their invoices as their VAT numbers are still with HMRC.
But yesterday, FreeAgent told FreelanceUK that the delays shouldn’t actually impede start-ups, given such nascent businesses “typically don’t register for VAT straight away anyway.”
FreeAgent’s Emily Coltman was alluding to new traders not needing to VAT-register until turnover exceeds £85,000, and even then, a 30-day grace period applies before HMRC can issue a penalty.
But it’s a 40-day wait (and counting) that is currently bothering the chief financial officer of an architectural company.
“I just counted [the] 40th working day since [our VAT] registration request [got] submitted,” the CFO posted online. “Yes…it was anti-climactic.”
Yet 40-something days is quite good going, according to specialist accountant Jane Deeks, who spoke this week of HMRC potentially taking six months to issue a VAT number.
'Effective Date of Registration can't be changed'
“Delays [of six months] from HMRC advising what your VAT number is, does not change your EDR – the Effective Date of Registration,” the owner of Deeks VAT Consultancy advised.
“[Sole traders] should assume that they are VAT-registered from the date requested on the VAT registration application.
“[But as your] business cannot show VAT on its invoices until it has a VAT number… [you should go ahead and] charge a gross amount initially and when the VAT number is received… [then] re-issue those invoices showing the VAT.”
'Risk here is that the customer might refuse to pay'
On their invoices, sole traders waiting on their VAT number were advised by Deeks to include the following statement to their clients:
“Please note: We have registered for VAT but have not yet received our VAT registration number. Once we receive it, we will issue a valid VAT invoice.”
Deeks added that the alternative is to issue an invoice without VAT and then, once the number is received, for the sole trader to then issue a “VAT-only” invoice
“But the risk here is that the customer might refuse to pay on the basis that it has already paid,” the specialist accountant continued, writing on LinkedIn.
“A business customer will usually have no issue paying a VAT-only invoice, but either way it is a risk, which is why HMRC’s guidance [advises] charging gross and [then] issuing a proper invoice later.”
'Customers should probably refuse to pay'
But chartered accountant Graham Jenner says he isn’t so sure about the official guidance by the taxman.
"The HMRC advice of billing gross is all well and good, but freelancers’ customers can, and probably should, refuse to pay the amount that has been added to cover the VAT due,” Jenner & Co's founder told FreelanceUK.
“Customers of the [yet-to-be VAT registered] self-employed can't recover it as input VAT as they don't have a valid VAT invoice at that point.
“And VAT registrations aren't guaranteed -- so the customer risks paying ‘VAT’ that can't be recovered as input VAT, or incorrectly charged by the supplier if registration [gets] refused.”
'Accoutancy software can help'
According to Coltman, the newly self-employed waiting on their VAT registration should find accountancy software comes to the rescue.
“FreeAgent has a VAT setting called ‘Registration Applied For,’ which, when a [user] selects it, will increase the value of their invoices by 20% but without showing this separately as VAT,” she said.
“Using this approach means that…[they] can bill their customers for the full value of their services, including the VAT that they will later pay to HMRC, and not have to go back to their customers at a later date and ask for more cash.”
'Cash flow issues'
The accountancy platform’s chief accountant, Coltman also said a “warning message” can be displayed on-screen -- at the top of any invoices issued -- while VAT registration with HMRC is pending.
And that warning serves as a reminder that the invoice will need to be re-sent, once the VAT number is received from HMRC.
But in a statement to FreelanceUK, Coltman gave her own warning, of sorts: “Delays to VAT registration can cause potential cash flow issues for small businesses,” she cautioned.
“After all, they are having to collect and keep VAT that they will later pay over to HMRC, and not spend it, while at the same time not being able to reclaim VAT on their bills until their VAT registration number is received.”
'Wannabe freelancers shouldn't let VAT registration delays put them off'
More positively last night, Jenner and Co reassured that freelancers’ customers often agree to pay the VAT “if the correct wording is used on the invoice.”
Echoing the sort of wording recommended by Deeks, Mr Jenner also said: “Customers are likewise understanding when it comes to suppliers having to charge net, ahead of issuing VAT-only invoices later.
“In short, wannabe freelancers shouldn’t allow these significant VAT registration delays to prevent them setting up their business. But those new to self-employment will likely need to seek advice from an accountant regarding the cash flow implications of the long wait until VAT registration completes.”
HMRC has been invited to comment.
UPDATE: A spokesperson for HMRC told FreelanceUK: “Most VAT registrations are being processed within the usual 40 days.
"Our service had been affected by extra checks being introduced to stop a recent spike in fraudulent claims. Businesses can continue trading while they register.”
23rd May 2023