Advice - General / VAT (Value Added Tax)
If your turnover exceeds the threshold figure of £85,000 a year (as of July 2021) and you do business in the UK, you must register for Value Added Tax (VAT). Your turnover is the total money you take in from your work, including for example repayments of expenses. If it's more than the limit you must register whether you are trading as a human or as a company.
You must register as soon as your turnover in any tax year exceeds the current threshold. You must also register immediately if you have "reasonable grounds to expect" that your turnover in the next month will be over the threshold - for example, if negotiations about a job worth £85,000 are going well!
Some freelances find it worth registering before they reach the threshold, if they calculate that it will be financially worthwhile to claim back the VAT paid on equipment. The high cost of photographic equipment can make this particularly attractive for photographers.
Being registered can also be helpful - but not decisive - in persuading clients not to deduct Income Tax and National Insurance at source: see "Employment status", linked below.
How VAT works
Any freelance who is registered for VAT must add it at the current rate to every invoice they issue. When they fill in a VAT return they add up the total VAT they have charged (confusingly, the forms call this the VAT on their "supplies"). They also add up the total VAT they have paid on business equipment and what the forms call "inputs". They must pay the difference to HM Revenue and Customs. This net payment therefore represents the tax on the "value added" to the inputs.
You can also claim back the VAT on some assets acquired before you registered.
If your client is registered for VAT, your work for them as a VAT-registered freelance does not cost them any more. They claim back the VAT on their inputs from VAT-registered freelances, just as you claim back the VAT on your inputs. (Of course a freelance who worked entirely for small organisations or those that have trouble doing accounts would meet resistance - but such a freelance would have other problems.)
Usually, clients that operate self-billing systems accept that VAT-registered freelances will submit actual invoices. Faced with a particularly obtuse accounts department, however, it may be necessary to invoice separately for the VAT only, after the main payment has arrived.
Beware the dark side
A freelance who is registered for VAT will re-claim £300 VAT after they buy computer equipment for business use with a price tag of £1500 (at the August 2021 rate of 20 per cent).
We advise, however, thinking seriously before registering voluntarily. The work involved in filling out VAT returns may wipe out any advantage - particularly if you are paying an accountant to do it.
VAT records must be preserved for six years. The penalties for late completion of returns and late payment of due VAT can be severe.
If your turnover is under £1,350,000 (!) you can apply to send in just one VAT return a year, due two months after the end of your financial year. This can reduce the administrative overhead. You must still, however, make payments of your estimated VAT liability at least quarterly.
The flat-rate scheme
Some freelances swear by the "flat-rate scheme". Under this, you pay a flat percentage of your receipts to the government. This saves the effort of adding up all your invoices and all your receipts. But do please pay attention to the warning about "limited cost" businesses below.
For what HM Revenue and Customs describe as "journalists" this flat rate is 12.5 per cent - and for photographers it is 11 per cent (as of July 2021). These are percentages of your turnover including the VAT you pay out.
For each £1000 that any photographer who is registered for VAT bills to clients, if they are registered for VAT they must charge an additional £200 in VAT. Under the flat-rate scheme they would pay £132 of this to the government, leaving them £68 toward the VAT they paid out on equipment and supplies. A journalist who is not a photographer would pay £150, leaving them £50.
You can apply to HM Revenue and Customs for permission to go on the flat-rate scheme when you register for VAT, or afterwards. The scheme is available to those whose turnover is less than £150,000 (as of July 2021).
While on the flat-rate scheme, you can also still claim back the actual VAT you paid on capital asset purchases that cost £2000 or more each (including VAT).
In your first year of registration you can pay one per cent less than these rates - that is, you keep an extra £10 per £1000 of gross billing.
One accountant comments that the Treasury would never have approved this scheme if it meant that freelances paid less. The existence of the scheme does lighten the dark side by providing an escape route from doing full returns: but see the warning below.
The catch with the flat rate scheme: ‘limited cost’ businesses
In 2017 the government introduced a new, higher, flat rate for "low cost" businesses: these must pay 16.5 per cent of their gross turnover. This was announced as a measure to combat fraud.
A business is defined as "low cost" if its VAT inclusive expenditure on goods is either:
- less than 2 per cent of its VAT-inclusive turnover in a prescribed accounting period; or
- greater than 2 per cent of its VAT-inclusive turnover but less than £1000 per annum.
Note that this is based on expenditure on goods - "moveable items" - and not on services such as your accountant's fees.
Clearly, if you sign up to the flat rate scheme and get caught by this you are very likely to be out of pocket. It seems to be a bad idea to apply for the flat rate scheme unless you are sure that more than 2 per cent of your turnover will be on "goods" in each future year.
If you can show that your turnover will be under £83,000 (as of August 2021) you can apply to de-register. Yo will have to go on accounting for VAT until HM Revenue and Customs agree that you can deregister.
Text © Mike Holderness & previous contributors; Moral rights asserted. The collection (database right) © National Union of Journalists. Comments to firstname.lastname@example.org please. You may find the glossary helpful.
The National Union of Journalists must not, can not and would not wish to dictate rates or terms of engagement to members or to editors. The information presented here is for guidance and as an aid to equitable negotiation only.
Suggestions apply to contracts governed by UK law only. In any event, nothing here should be construed as legal advice.