Invoicing, Tax & Admin

Should I charge my clients VAT?

Allison S Robinson | 15 April 2021 | 3 years ago

Should I charge my clients VAT

VAT (Value added tax) is a consumption tax paid by the end customer. It can be complex and time-consuming, with penalties if you get it wrong.

Obligatory registration for VAT is driven by your business’s annual turnover and the products sold. Voluntary registration is also an option.

There are different VAT rates for different products, in different circumstances, with some exempt scenarios.

Here’s the inside track on VAT.

What is VAT?

VAT is a business consumption tax on sales of goods and services. An annual turnover of >£85, 000 (in 2020/21) means you must register for VAT.

Businesses collect it on behalf of the government by adding it to their goods and services and then paying it across to HMRC.

VAT registered businesses charge their customers VAT and pay VAT on products and services they buy (raw materials, professional services such as consultancy fees or accountancy services, business phone calls, etc.).

VAT registered businesses claim back the VAT that they pay on business expenses from VAT-registered suppliers. This excludes flat rate registered businesses making <£2, 000 non-capital purchases.

HMRC is paid the difference between the VAT collected, and the VAT paid out to suppliers. More VAT expenditure than receipts results in an HMRC refund.

VAT is charged on business sales, loaning goods, selling business assets, commission, items sold to staff (canteen meals), business goods used for personal reasons and ‘non-sales’ (gifts and part-exchange).

If your annual business turnover is <£85, 000, VAT registration would be voluntary. Once registered, you will charge your customers VAT. You can then recover the VAT you paid out – saving costs! 

Do I have to charge my customers VAT?

If you are a VAT-registered business, you are effectively an unpaid tax collector. You charge VAT on what you sell and pay it across to HMRC.

Many VAT-registered businesses save money by being registered.

Your business will pay it on any purchases made. VAT is declared in a VAT return showing total VAT collections (output), and total VAT paid out (input) for each tax period.

Once registered for VAT, you will charge all of your individual customers VAT. If you collect more VAT from sales than you paid to suppliers and service providers, you will owe the surplus to HMRC. If you pay out more VAT than you collected from all your customers, you reclaim the money from HMRC.

To get this right, you must know of the right VAT rate to charge. There are three rates of VAT (2021) dependent on the goods or services you provide. You add this VAT to the product or service price when selling to business AND non-business customers.

Most goods supplied to non-EU countries and any goods sold to VAT-registered EU businesses are zero-rated. There are many other exemptions, and if you trade exclusively in zero-rated goods or services, you can apply to HMRC to be exempt from VAT registration. You will NOT be able to reclaim VAT incurred on business purchases or expenses.

If you are invoicing clients for transactions in foreign currencies, show the total payable VAT in pounds sterling on your invoice with an English translation of the invoice on record. When converting the total VAT into GBP, use one of the HMRC methods: market selling rate at the time of supply, the European Central Bank rate or HMRC’s period rates of exchange. 

Do you charge VAT on professional services?

If your business is to supply accounting services, business consulting services, PA services etc. and your turnover last tax period was >£85, 000, you need to register for VAT.  After registering, you will charge VAT on your professional services.

It does happen that turnover can fall below the VAT threshold in the period directly following registration. The drop would need to be signed before you should apply to deregister – the deregister threshold is £83, 000. After that, you will not need to charge VAT on your professional services.

You can check on the HMRC website if your business or products are VAT exempt. 

Should my business voluntarily register for VAT?

VAT increases your prices, but if your clients are VAT registered clients, they will reclaim the VAT. You then reclaim VAT on business expenses, thereby boosting your profits.

Sales to private individuals don’t benefit from voluntary VAT registrations. You should still, however, review whether reclaimed VAT on expenses outweighs the lost sales.

VAT also requires extra accounting and a quarterly VAT return submission. Additionally, VAT rules are complex, and sales in different countries will require different VAT prices.

Starting VAT pricing means amending I.T. systems and e-commerce sites with new prices that might involve significant admin and/or costs.

An advantage for VAT registered businesses is the level of credibility it gives your business and a stable company’s appearance. Certain customers will ONLY work with VAT registered companies.

Do I need to pay VAT as a small business?

If your business sales turnover is >£85, 000, then it is compulsory you register for VAT, charge VAT, pay VAT and submit VAT returns on a quarterly basis. You can check if your service or product is exempt on the HMRC website.

If not, you register and opt for which preferred system you will use to inform the government on VAT output and input. There are a few methods, and the differences are in the reporting manner:

Standard VAT accounting method – This common method involves keeping a VAT record of all purchases and sales for your quarterly VAT return. VAT owing is paid, and refunds are repaid quarterly.

Annual accounting scheme – This option is for businesses with ≤£1.35 million, and VAT is reported VAT once a year. You make nine monthly or three quarterly advance payments towards the VAT bill but submit a tax return once a year and settle the outstanding balance simultaneously or apply for a refund of overpaid funds.

Flat rate scheme – Under the flat rate scheme, for smaller businesses with a VAT turnover of ≤£150, 000 (excl VAT), you pay a fixed rate of VAT, representing a percentage of your turnover. The actual rate depends on your industry. You still charge VAT on sales, but you don’t document the VAT per transaction. You can’t reclaim the VAT from purchases.

Cash accounting scheme – Paperwork and cash flow management are easier when using the Cash Accounting Scheme. You account for VAT on payments made and received, and you reclaim VAT on your purchase PAYMENTS to suppliers. There are several eligibility requirements for this scheme, such as:

– The business’ taxable supplies in the following year must ≤ £1.35 million.

– There are no outstanding VAT returns or HMRC debts.

VAT margin schemes – The VAT rate of 16.67% is only applied to the difference between the product cost price and sale price, not the full selling price. The margin scheme applies to second-hand goods, works of art, antiques, or collectors’ items.

The other schemes you can find on the HMRC website are the VAT retail scheme, Point of Sale scheme, Apportionment scheme, Direct Calculation scheme and the Bespoke retail scheme.

All of these retail schemes can be used in conjunction with the Cash Accounting scheme and the Annual Accounting scheme, but not the Flat Rate scheme.



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