Self-Employed VAT Advice: Keith Graham
VAT for self-employed people can be a complicated topic, especially if you have not registered for VAT yet. If you work as a freelancer or a contractor, or you run your own business, you need to know about VAT, including what it is, when to charge it, and how to pay it.
Registering for VAT
In the UK, you only need to register for VAT if you are earning over a certain amount. At the moment, this is when the total amount of goods or services you sell has a value of over £85,000 in any 12-month period (as long as these are not VAT-exempt).
You do not want to pass this limit without registering for VAT. You may think that you are exempt because you are a freelancer or because you do not have employees, but this is not the case. You must also register if you think you will go over the threshold in a 30-day period.
After You Register
After registering, you must start charging VAT on the services or goods that you sell. The end customer essentially pays the VAT, and you simply pass it onto HMRC.
Avoid Mistakes with VAT Returns
You need to pay your VAT quarterly by filling out your VAT return, so your accounts must be up to date every three months.
There are a number of mistakes self-employed people make with their VAT returns. These include failing to claim back VAT on fixed assets they purchase for the business, and there are various rules surrounding this. Sometimes you might claim VAT on items that are exempt like insurance, which is also a common mistake.
Prepare Your Business for VAT
Once you are registered for VAT, you must pay it on the value of everything you sell. This can be a problem where you work with individuals because they cannot claim back the VAT like a business can. Do you put up your prices? Or do you absorb the cost yourself?
Get VAT advice to plan for this early. If you think you will go over the threshold, speak to an accountant and know the liabilities involved.
Know the Rates
Most products and services apply the standard rate of VAT, which is 20 per cent. But some things only have a 5 per cent rate and others are VAT-exempt, like types of food. Make sure you know what rate you should be charging.
Consider the Flat-Rate Scheme
With VAT for self-employed people, you may want to use the flat-rate scheme. This is where you pay a fixed rate that is a percentage of your turnover, and the rate depends on your business.
Often, it is less than 20 per cent. So you charge your client 20 per cent, but pay less in your VAT return. It is designed to simplify VAT for small businesses.
With this, you can't reclaim VAT when you buy something in most cases. So if you don't buy many goods and services to help with your business, this may be a good option.
Some big changes were introduced to the flat-rate scheme in 2017, which make it less attractive for what HMRC call 'limited cost traders' which you can read about here. This is one of the reasons why seeking professional advice is always recommended.
Always Submit Your Returns on Time
You are essentially collecting tax for HMRC, and penalties can be large if you fail to pay your VAT on time. Avoid problems by always submitting your returns on time. You could even set up a direct debit to make this easier.
Speak to an Expert Today
When it comes to VAT for self-employed people, it's important to get your VAT right to avoid penalties that can affect your business and to plan properly for when you go over the threshold.
If you do not yet charge VAT, or you are having issues with yours, contact us today. We provide VAT advice for the self-employed in Surrey and Hampshire, and we can help you plan for it properly to avoid problems so you can grow your business successfully.