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?

What industry /line of work are you in?

VAT is a tax for the end consumer, collected by the business. So the client would claim the VAT back on their return, if they're VAT registered.

@KellyWithABigBelly

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.

How can you be struggling for work if you're over the VAT threshold?

You have to have a turnover over £85k to have to pay VAT?

who are these clients? like i said, if charity or insurance, they won't be able to reclaim the VAT. So it would be an extra cost. Others like that maybe opticians?

Why not do your own invoicing and bin this company? It doesn't sound like it's your company. Is it a factoring company or something?

And don't ask people if it's ok to charge vat. What if they say no? Bill me without it.

You quote them

£X including VAT
or
£Y excluding YAT

Sounds a bit dodge, how are you only able to invoice through this ltd company if you are self employed?

So are we talking IR35 issues and umbrella companies rather than a straight forward trading situation?

I can see how vat could muddy the waters in this case

I don't understand your setup at all.

I have my own limited company, have been VAT registered, invoicing to big companies and it's never been an issue at all. Are they dodgy?

Also... I don't think I pay 30% tax on turnover, once I subtract expenses it's far lower than this on profit.

If you are earning £85k plus I really don't understand how you are feeling the strain... I'm very confused.

The limited company is set up with two family numbers. Accountant has said it’s the best setup and it would be very hard for me to abandon it, even though if it was just me I wouldn’t be anywhere near having to charge VAT.

I don't see why this is profitable for you to do it this way? You all do different jobs for different things under this Ltd company umbrella?

What sector are your clients in?

Why not do the work as a sole trader and then you wouldn't need to add VAT?

Hi OP
You need to get savvy on the financial set up of your business and market
VAT is applicable at a certain £ level, but yes like you say many business are effectively required to bill vat only companies- in my case we do and therefore all SE people register via an agency and it’s dealt with that way rather than them all becoming VR
In terms of rates-
Don’t pitch for a job and see what charge is
Have a rate sheet and that’s that
You will win and lose that way but not be always wondering where you sit
So for example I recently awarded work so someone on £500 a day ahead of someone £200 because they were more experienced and could turn job better and quicker- ultimately cost was 1.5 days vs 3, so same...
Be clear on your rate and relevance and go from there
Never apologise for your rates
£100 a day- barely minimum wage...

@KellyWithABigBelly

The limited company is set up with two family numbers. Accountant has said it’s the best setup and it would be very hard for me to abandon it, even though if it was just me I wouldn’t be anywhere near having to charge VAT.

if you are both fee earners then split and have 2 companies

This sounds weird.
You should get independent financial and business advice from someone unconnected to all this.

Oh, and better? Better for you? Does it give you a higher income than going it alone would?

You really need to try and do either a basic course on financial management for small businesses or be willing to pay an independent accountant a fee to go through your business structure with you and / or look after your accounts.

I don't mean that to sound patronising but your grasp on this is going to land you in hot water either by unwittingly doing things wrong or losing out financially.

Best thing I ever did when I set up was getting a local, reputable independent accountant - they've saved me from making silly mistakes and held my hand to understand what I need to about my business.

You really must make that a priority or you're going to fall foul of not understanding the financial side of your work.

My DPs had a limited company run in shared premises and with a small amount of cross over trade but minimal. One sold items (retail) and the other provided a service (hospitality).

They split into 2 to keep each below the VAT threshold.

@KellyWithABigBelly

The limited company is set up with two family numbers. Accountant has said it’s the best setup and it would be very hard for me to abandon it, even though if it was just me I wouldn’t be anywhere near having to charge VAT.

It may be "better" for the other family members, but not for you. You really need to split and run your own business.

It's not the VAT that's causing your problems, it's your "family" set up.

Just because you have a limited company doesn’t automatically mean you need to register for VAT, unless turnover is over a certain figure.

I can’t see how you can be losing business over it though, surely your competitors also charge VAT? I expect most goods & services I purchase will be subject to VAT.

When a company VAT registers they essentially become a government tax collector.

If in a month they charge work out to their customers at £1000+VAT =£1200..
£200 goes to HMRC.
Yet they still have the £1000.

If they then pay you £800+ VAT they pay you £960. |(£800+£160 VAT)
Their profit for the month is £1000-800 = £200.

But they can claim that £160 back from the 200 they charged their customer, so the net payment they make that month to HMRC is only £40.
They still have their £200 profit after paying you.

So charging /paying VAT is irrelevant to them and a bullshit reason not to give you the work - unless they want to pay a smaller contractor out of choice, or perhaps they're not VAT registered themselves?
If they're not VAT registered and say they cannot afford you then that's a different matter, they should be charging more for their work in the first place, they're not making enough profit....and you should steer clear as it wouldn't take much to tip them into debt.

I say stop being so apologetic. Quote your price as £800+VAT. It's a fact of life. You are a tax collector. Not making any money out of it.

Also do all your customers have to be small? Can you also aim for bigger customers who wouldn't bat an eye at VAT?

I definitely need to rethink this. I benefit indirectly from the family set up but not directly so maybe I need my own company. Thanks for all the advice.

@KellyWithABigBelly

I definitely need to rethink this. I benefit indirectly from the family set up but not directly so maybe I need my own company. Thanks for all the advice.

I think what everyone is telling you is that you don't need a company at all. Is there a reason that you can bill the work as a self employed person?

to be fair, a lot of clients prefer a Ltd company, it's more "formal" in their eyes.

But as the OP won't say who her clients are, we can't work out why they do not like her VAT registered status (ie Insurance companies or say opticians or charities may not)

I do marketing for smallish businesses. But most other people doing it aren’t charging VAT because they’re not set up in the same way I am. Not charities or insurance.

I do marketing for businesses too.

Why isn't it easier for you just to set up your own company? Then you don't have to worry about VAT.