VAT - how to broach it with clients

[KellyWithABigBelly]

I am self employed and invoice clients through a limited company. This means I need to add VAT to invoices.

My clients are small and I’m always worried they won’t want to use me because of the extra 20% so I end up being apologetic about it.

Instead of sounding professional I say things like “I’ve got a limited company... so do you mind awfully if I invoice you that way... but that means VAT... I’m terribly sorry... so is that okay?” I end up sounding like a little girl.

How can I word it in an email/conversation so I let them know I have to charge VAT but don’t sound apologetic about it?

@KellyWithABigBelly

I’ve just lost another potential client due to VAT. So frustrating. It’s a big business so definitely VAT registered itself unless it’s doing something dodgy with its accounting. But apparently they won’t use a contractor that charges VAT.

If they're Vat registered, it should make no difference to them whether you charge VAT or not. In 38 years as an accountant I've never heard of someone being turned down by a VAT regd business because they were vat regd. It makes no sense. Sounds like an excuse or a misunderstanding.

Op it doesn't seem like you fully understand VAT. I have my own ltd company. I am the director of the company and currently I am the only 'employee'. I don't pay VAT as the company takes in less than the VAT threshold. Not paying VAT does not make it a less legitimate business.

OP do you mean you work through a large company which is over the VAT threshold itself meaning you have to charge it on your invoices? I think your OP maybe read like they charge VAT because they are limited which obviously isn’t the case.

You just really need to quote your prices like ‘it’s £120 a day including VAT’. It’s that simple. Don’t make the VAT an afterthought or a surprise to them.

Nothing that you are posting is making sense at all

Can you post with real examples? Describe what you mean in more detail.

Echo a PP. As a vat registered business it has no effect on me if a supplier is registered.

Unless I was partially exempt I suppose. But that is not too common

Here’s the real example of the one that just said they wouldn’t use me due to VAT.

I got offered a contract to carry out a piece of work for £800. I responded to say great, gave them company details and said business is VAT registered. They responded to say they would not be able to pay VAT on top of the £800 and I would have to pay the VAT out of the £800. They said they were happy to offer the work to someone else otherwise.

Unfortunately the limited company does need to be VAT registered - it’s not just me invoicing through it so it is over the threshold.

So could you not do the work for 720 + vat?

If you deal with say insurance companies they can't reclaim the vat as they don't charge vat on supplies. Must be other industries like that. You just need to learn who they are.

Surely if they'll pay £800, then you just write it up as £650 ish plus £150 VAT?

As others have said, if they are setting the price you just include vat in that so if they are paying you £800 you charge £666.67 +VAT.

I’m intrigued though. What do you do where clients set the price? You obviously don’t have to answer that!!

As pp have said include x amount including VAT or for business to business, as is standard without VAT.

I think the £800 client is taking the piss out of you. Why are you not dictating the prices to clients, rather then them dictating what they will pay to you?

No need to apologise for charging VAT either.

OP..This is very drip fed, and your situation is unclear.
If your clients are setting the price (?), yes they don't want an extra 20% on top. so you either take the vat out or change the business entity ,ie you become a sole trader or set up your own Ltd co.
take proper advice from an accountant or bookkeeper where you can actually fully explain what the business does and how it is operating and they can advise accordingly.

The only time I have experienced similar was a charity with a government grant. Say the grant was £5000 to do piece of work Y, then the £5000 they paid me had to include the VAT.

I have no idea why.

Does your business need to be VAT registered OP?
You can ask HM Revenue and Customs (HMRC) to cancel your registration if your VAT taxable turnover falls below the deregistration threshold of £83,000.
It will matter to non VAT registered customers and it must be frustrating if you deal with both - but VAT registered businesses should understand how these things work. I would be getting acknowledgement from non VAT registered business that you have to charge VAT for your services and if they are happy with that you'll quote. Of course people will always try and negotiate on price - that's a business decision for you to consider - some people always like to think they've done a deal.

The only time I have experienced similar was a charity with a government grant. Say the grant was £5000 to do piece of work Y, then the £5000 they paid me had to include the VAT.

Probably because they can't claim it back so they are just being clear that the price includes VAT rather than you adding it on when you invoice. I work with charities, some of the larger ones are VAT registered but the smaller ones pretty much never are, so it's a bit of a nightmare, I'm at the top of the price range anyway for the local work, so have ended up just taking the hit. I'm deregistered at the moment but may go over again in the next year or so. I contract to various others to deliver the larger contracts so it's not as if I have great personal wealth!

Thanks for everyone’s comments. Sadly I’m pitching for work against people who aren’t VAT registered and it seems, like PP have said, I either need to pay the VAT myself out of the rate for the job, or not take on the work (but I’m struggling for pieces of work as it is in the current climate.) I will obviously carry on doing the right thing and paying VAT (I really don’t need to add issues with HMRC to my worries) and accept I’ll often have to take a 20% hit on earnings. Once you take off a further 30% for tax and national insurance it becomes hardly worth working. Thanks for everyone’s advice.

That makes no sense. Cost to a VAT registered business is £800 whether it’s you or a non vat registered supplier. The additional VaT they pay you is claimed back by the vat registered client. Same as the VAT element of business supplies that your company buys (inc your accountant’s fees). It’s a government tax, not something to apologise for

Can you not just come out of this strange limited company set up and start all over again, set up as a self employed freelancer who just charges £100 a day or whatever?

@PuppyMonkey a self employed freelancer who earns £85k + will still have to register for vat and charge it!

[quote MatildaonaWaltzer]@PuppyMonkey a self employed freelancer who earns £85k + will still have to register for vat and charge it![/quote]
She say that the reason the company is VAT registered is that other people work through it, I agree, look into being a sole trader

I either need to pay the VAT myself out of the rate for the job

That makes no sense if you're working for VAT registered businesses - because then you'd be undercutting all the smaller non-VAT reg'd businesses tendering.

VAT is not a cost to a VAT registered business. Stop describing it as a cost to your clients!

So, business customer says "we're prepared to pay £600".

NonVAT registered business charges them £600. Business customer's cost is £600.

Your VAT registered business charges them £600+VAT. Business customer's cost is still £600.

Zero cost difference.

Alternatively, your VAT registered business charges £500+VAT (total £600). Business customer's cost is now £500 and you are a bargain.

VAT is a cashflow matter for VAT registered businesses, not a cost.

I don't think it can help if you reply to people saying things like "ok, but I will have to charge you £120 not £100 as I'm VAT registered" - it makes it sound like you're going to charge them a higher rate when you're not. Just say "the rate will be £100+VAT" .

This just doesn't add up tbh.

I agree. You have a wierd view of VAT. It's not a cost. Can't you see that? The price of the job is NOT £100 or £120. It's £100.

@KellyWithABigBelly

I’ve just lost another potential client due to VAT. So frustrating. It’s a big business so definitely VAT registered itself unless it’s doing something dodgy with its accounting. But apparently they won’t use a contractor that charges VAT.

This is weird

I was a contractor for years and always charged VAT because I earned over the VAT threshold.

It has absolutely nothing to do with being a limited company though.

It's whether you earn over £85k(?) turnover per annum which is the threshold. If you earn over that you'd have to pay VAT whether you are a limited company or a sole trader.

You should ALWAYS quote your rates including VAT so they are clear up front.

So either:

This project will be £xxxx inclusive of taxes (with the invoice providing the breakdown)

OR

£xxx+ £xxx VAT which is £xxx total

The best and least confusing is the former.

I wouldn't use you if you quote £X and then came back and said "I'm sorry, that will actually be £Y as I'm a limited company due to VAT" as this would make me think you don't know what you're doing or would be inefficient and a pain in the arse to work with (sorry, blunt and it doesn't mean it's true but that would be my perception!)

Btw, it's a 16% "hit" not 20% if you decide to treat your rate as VAT inclusive instead of exclusive.

If you're adding VAT to a fee you multiply by 1.2

If you're calculating the VAT included in a fee you multiply by 1/6. (Or 5/6 for the net amount.)

£600 fee net of VAT: 20% of £600 is £120, so gross fee is £720. (VAT reg'd customer's cost still £600, tho the cash they pay is £720. Your income is £600.).

£600 fee gross of VAT: 1/6 of £600 is £100, so net fee is £500. (Customer pays £600 cash, cost to them is only £500. Your income is £500).

If you want to receive £500 then quote 500+V or £600 incl VAT.

Either way, your income is the same as the cost to a VAT req'd customer.

But it's not a 20% hit to you.