UK - reclaim VAT on purchases for freelance work

Question

I have a small freelance income in addition to having a day job. It's enough that I need to file a tax return for the extra money that I earn.

My freelance work necessitates a reasonable outlay in terms of expenditure. I understand that I am allowed to offset this against the amount I earn from this work, and am taxed on the remainder.

However, I seem to recall reading or being told somewhere that freelancers and/or businesses were allowed to reclaim Value Added Tax (VAT) on purchases essential to their work. I'm not sure if this is true or not. Google isn't a lot of help (or I'm searching for the wrong things) and I'm not earning enough to employ a financial advisor to ask!

So - am I allowed to claim back the VAT I've paid on essential purchases in addition to setting their cost off against my income? If so, how?

Answer 1

If you mostly do work for businesses/individuals who are VAT registered it's a no-brainer to become VAT registered yourself...

Although you will have to charge your customers VAT (and pass this on to HMRC) because they are VAT-registered they will reclaim the amount so it won't actually 'cost' them anything. At the same time, you can reclaim all the VAT you're currently being charged on your business expenditure (business equipment, tickets to business events, business software, accountancy/other business services you pay for, web hosting etc etc etc)

However, if most of your clients are not VAT-registered it's not worth you registering. You would have to charge your customers an extra 20% (and they wouldn't be able to claim it back!) and you would have to pass this on to HMRC. Although you could still claim for goods and services you purchase for business use, essentially you'd just be another tax collector for HMRC.

That said, at the end of the day it's up to you! VAT returns are quarterly and dead simple. Just keep a spreadsheet with your invoices (output tax) and receipts (input tax) and then do some basic maths to submit the final numbers to HMRC. No accountant required!

Answer 2

You are either VAT registered or you are not VAT registered.

If you are not VAT registered, then you are not allowed to charge customers VAT, and you cannot reclaim VAT that you are paying. You are however allowed to deduct the cost of goods including VAT from your expenses. So if you buy a computer for £1000 + £200 VAT, and you can deduct the computer as an expense to reduce your profits that you pay income tax for, then the expense is £1,200 and not just £1,000.

If you are VAT registered, then you MUST charge every customer 20% VAT. Business customers don't mind at all, but private customers will be happier if you don't charge VAT because your bills will be a lot lower. You take all the VAT that you received, then subtract all the VAT that you paid for business expenses and that you have invoices for, and send the remainder to HMRC four times a year. (The reason that businesses don't mind paying VAT is because they can in turn deduct the VAT they pay you from the VAT that they received and for every pound they give you, they give one pound less to HMRC). Note that when you have expenses that are deductible from your profits, you can now only deduct the cost excluding VAT. On the other hand, the VAT you receive doesn't count as income and doesn't lead to profits that you need to pay income tax for.

It's your decision whether you want to be VAT registered or not, unless your revenue exceeds some limit (somewhere between £70,000 and £80,000 per year) where you must register for VAT.