VAT for freelance copywriters

[nrv0us]

Can anyone give me any advice about how VAT works in the freelance game? Am I right in thinking that it only becomes an issue if you are earning over £70,000/yr?

Yes, although I'm not sure exactly what the figure is. You can register voluntarily if your earnings are below the threshold. This allows you to claim VAT back on business purchases but is only really beneficial if you are dealing with VAT-registered companies.

Current registration limit is £81,000 of VATable turnover.

You can register below that by choice but only advisable generally if most of your customers are VAT registered.

If your customers are largely vat registered (and so don't really care whether you charge vat) then you are often better to voluntarily register under the flat rate scheme. You then charge clients tax at 20% but pay it back to HMRC at a lower rate (so you gain by keeping the rest).

Speak to your accountant.

I thought you paid back exactly the same amount back to HMRC you have received (minus any VAT reclaimed on expenses). I've certainly never heard of a different rate and have been VAT registered for around 15 years!

Atticusclaw talks sense. As well as standard VAT accounting which you use Contraryish there is also the VAT flat rate Scheme. Rates vary and not all businesses are better off under it. It is worth checking with an accountant as comparison calculations can be tricky.

The FRS is set at a level that the average business in that sector would be no better or no worse off by using it. I have some clients that save a lot of money on it and some who would lose money on it. Just remember the %age is lower but is a %age of the gross amount (ie including VAT) rather than the net amount so is not necessarily as good as it may seem at first glance.

Ah, OK, thanks Mynewname, I was beginning to wonder if I'd been getting it wrong!

For me it worked since I had no real costs in my business. I didn't need to buy anything and so the fact that by being on the flat rate scheme I couldn't reclaim vat on the things I bought didn't make any difference. My repayment rate though was 14.5 percent (13.5 percent in the first years) and so it did generate extra income.

It works for me as I can reclaim VAT on anything I buy " for the business"

THing is that with VAT and tax at the same rates, what you reclaim the VAT on you pay the tax on so the differentials are minimised almost down to cashflow and timing differences

Well yes the VAT rate and tax rate are the same at 20% but it does really make a big difference. If you buy something at £1.20 and claim 20p Vat back, you then have a tax deductible expense of £1 so the net cost to you is 80p.
If however you can't claim the VAT Back you have a tax deductible expense of £1.20 so the net cost to you is 96p. (I.e. £1.20*80%).

I would say a 16p difference is really quite significant and not just a cash flow issue.