Revised: 2007-10-07

VAT (Value Added Tax)

If your turnover exceeds the threshold figure of £64,000 a year (as of 1 April 2007), you must register for Value Added Tax (VAT). You must register as soon as your turnover in the previous twelve months (or less) exceeds the current threshold. You must also register immediately if you have "reasonable grounds to expect" that your turnover in the next month will be over the threshold - that is, if negotiations about a £64,000 job are going well!

Some freelances find it worth registering before they reach the threshold, if they calculate that it will be financially worthwhile to claim back the VAT paid on equipment. The high cost of photographic equipment can make this particularly attractive for photographers.

Being registered can also be helpful in persuading clients not to deduct Income Tax and National Insurance at source.

How VAT works

Any freelance who is registered for VAT must add it at the current rate to every invoice they issue. When they fill in a VAT return they add up the total VAT they have charged (confusingly, the forms call this the VAT on their "supplies"). They also add up the total VAT they have paid on business equipment and, er, supplies (in the English sense: the forms call these "inputs"). They must pay the difference to HM Revenue and Customs. This net payment therefore represents the tax on the "value added" to the inputs.

You can also claim back the VAT on some assets acquired before you registered.

Because (almost) all clients are registered for VAT, the work of a VAT-registered freelance does not cost them any more. They claim back the VAT on their inputs from VAT-registered freelances, just as these claim back the VAT on their inputs. (Of course a freelance who worked entirely for small organisations or those that have trouble doing accounts would meet resistance - but such a freelance would have other problems.)

Usually, clients that operate self-billing systems accept that VAT-registered freelances will submit actual invoices. Faced with a particularly obtuse accounts department, however, it may be necessary to invoice separately for the VAT only, after the main payment has arrived.

Beware the dark side

A freelance who is registered for VAT will save £262.50 when they buy computer equipment for business use with a price tag of £1500 (at the 2006 rate of 17.5%).

We advise, however, thinking seriously before registering voluntarily. The work involved in filling out VAT returns may wipe out any advantage - particularly if you are paying an accountant to do it. VAT records must be preserved for six years. The penalties for late completion of returns and late payment of due VAT can be severe.

Annual returns

If your turnover is under £660,000 (!) you can apply to send in just one VAT return a year, due two months after the end of your financial year. This can reduce the administrative overhead. You must still, however, make payments of your estimated VAT liability at least quarterly.

The flat-rate scheme

Some freelances swear by the "flat-rate scheme". Under this, you pay a flat percentage of your receipts to the government. This saves the effort of adding up all your invoices and all your receipts.

For what HM Revenue and Customs describe as "journalists" this flat rate is 11 per cent - and for photographers it is 9.5 per cent (as of January 2006).

For each £10,000 that any photographer who is registered for VAT bills to clients, they must charge an additional £1750 in VAT. Under the flat-rate scheme they would pay £950 of this to the government, leaving them £800 toward the VAT they paid out on equipment and supplies. A journalist who is not a photographer would pay £1100, leaving them £650.

You can apply to HM Revenue and Customs for permission to go on the flat-rate scheme when you register for VAT, or afterwards. The scheme is available to those whose turnover is less than £150,000 (as of January 2006).

While on the flat-rate scheme, you can also still claim back the actual VAT you paid on any capital assets that cost £2000 or more each.

It appears that in your first year of registration you can pay one per cent less than these rates - that is, you keep an extra £100 per £10,000 of net billing.

One accountant comments that the Treasury would never have approved this scheme if it meant that freelances paid them less. HM Revenue and Customs do, however, provide a ready reckoner to show what difference the scheme would make compared to full returns. And the existence of the scheme lightens the dark side by providing an escape route from doing full returns.

Deregistration

If you can show that your turnover will be under £58,000 (as of January 2006) you can apply to de-register. You will have to go on accounting for VAT until HM Revenue and Customs agree that you can deregister.

Generally useful links: