VAT advice for the self employed

As you may know, Value Added Tax (VAT) is added onto nearly every purchase anyone makes in the UK – whether you’re buying a bottle of wine from the supermarket or a new laptop, you’ll be paying VAT.

A business making less than £68,000 annually does not have to register for VAT. This means as a small company with a small turnover your products and services might be less than a VAT registered competitor.

If you are VAT registered you'll need to complete a return each quarter. When you complete your VAT return you tell HM Revenue and Customs how much VAT you have charged and how much you have paid. HM Revenue and Customs are hoping you'll charge more than you pay and will need to make a payment to them.

Basically, if you are buying lots of stock or good to run your company that have VAT added it's probably best to register. However if you don't, it's probably not worth the hassle and administration. 

Special note: There could still be a very good reason to register for VAT even if you don't meet the threshold or buy lots of goods - some people believe having a VAT number adds a certain credibility and prestige to their company, also some clients will only work with other VAT registered suppliers. Bear this in mind when making your decision. If you still can't make your mind up you can always call us and we'll be more than happy to help.  

If you'd like to speak to one of our self employed accountancy experts, call 0500 234 111.

The Flat Rate VAT Scheme

Instead of registering for the standard VAT scheme (outlined above), it may be more beneficial for you to register for the Flat Rate VAT scheme.

Within this scheme, you charge your clients at the standard rate and pay the government at a lower rate of the gross amount. Different sectors have different rates (call us to find out what rate you might be in). 

Find below an example for an IT professional whose flat rate is 12% in their first year (new companies get a 1% first year discount):

Amount you invoiced -                      £50,000 plus VAT £8,750
Total amount received -                   £58,750
VAT paid to HMRC -                          £58,750 * 12% = £7,050
(flat rate example of 12%)

The difference between the VAT invoiced (£8,750) and the flat rate paid back to HMRC (£7,050) is yours to keep as profit!

£8,750 - £7,050 = £1,700

You’ll need to speak to an accountant before you decide which scheme is best for you. They’ll be able to work out the most tax efficient way to pay VAT.

How to register for VAT

There are two ways to register for VAT:

1. Online – visit HMRC’s website.
2. Post – you can get the relevant written forms from your accountant

Registering online is much simpler and means that you won’t need to change your VAT process in the future. Get the advice of an accountant before you register.

Changes to VAT in 2010

There are plenty of changes to be aware of in 2010! Make sure you check with your accountant to work out how these changes could affect you.

1. VAT change from 15% to 20%

From January 1st the standard VAT rate will change from 15% to 20%. Make sure that any invoices you raise after this date have the new VAT rate added. One complication to be aware of is that, if you raise an invoice for any work carried out in December, you can still charge at the previous rate of 15%.
If you’re on the Flat Rate VAT scheme, there will be some changes to your flat rate. Make sure you check with your accountant as to any relevant changes in January before you submit a VAT return.

2. Online VAT returns

If you haven’t yet registered for VAT you’ll be required to register and submit your future VAT returns online. This is really simple on the HMRC online services website but your accountant can take you through step by step.

If you’ve already registered for VAT, and you haven’t already done so, you’ll need to start thinking about submitting your VAT returns online. As of April 2010, if your yearly turnover exceeds £100,000 you’ll need to register for online VAT returns in April. Those of you that have a yearly turnover under £100,000 can continue to submit paper returns but will eventually need to submit online.

3. Paying VAT

As of 1st April 2010, those who are VAT registered will need to start paying their VAT electronically. With the online system HMRC have developed this is relatively simple however if you’re in any doubt do speak to your accountant.

You might also like to read:

• VAT Basics
• VAT Guide
• VAT Flat Rate VAT Schemes Guide

If you wish to find out more about freelancing as a sole trader then you may also be interested in the following pages:

• Benefits of Freelancing - the benefits to you as a freelancer and to your potential clients
• Freelancing Part Time - can you freelance whilst still in your permanent role?
• Sole Trader or Limited? - which route is right for you?
• VAT and NI - how do VAT and NI affect you as a freelancer?
• Freelancer Insurances - what insurances do you need as a freelancer?
• Freelancer Take Home Pay Calculator - how much more could you earn by going freelancing?
• Finding Freelance Work - how to find your freelance roles
• Freelancer FAQ’s - all your questions answered