Should I charge my clients VAT?

Here, Emily Coltman of Freeagent answers a reader's query on whether they should charge clients VAT.

Q: I sell lightbulbs and my turnover is less than £85,000. I buy from my supplier who charges me VAT, I then give my clients their order and an invoice. But would it make sense for me to charge them VAT as well?

A: You can’t charge VAT to your customers unless you’re registered for VAT yourself; that is, you have applied to HMRC to be registered and they’ve accepted your application. Only businesses can register for VAT; members of the general public can’t, because VAT is designed to be ultimately paid by the end consumer.

You’re right that you don’t have to register for VAT unless your business’s VATable sales are over a certain limit. As from 1st April 2018 that’s £85,000 a year. You need to check this on a rolling monthly basis to see if you’re going to go over the limit in the last 12 months or the next 30 days; if you break the limit, you’ll have to register for VAT.

I say ‘VATable sales’ advisedly, because not all sales of goods and services in the UK are subject to VAT. Most are but not all. Of VATable sales, most are subject to VAT at the standard rate, which is 20 per cent at the moment. Some ‘quasi-essential’ goods and services, like domestic electricity, have VAT applied at a reduced rate, currently five per cent. Others have VAT on but at 0 per cent – and I know that sounds confusing!

The classic example of that is travel, such as air fares. These are all VATable sales. Sales that are not VATable are those that are exempt, such as the sale of stamps and insurance, and those that are outside the scope of UK VAT altogether, such as government-imposed tolls like MOTs.

If your business makes only exempt or out-of-scope supplies, it can’t register for VAT. So, if you’re making sales on which you would have to charge VAT if your business was registered, whether that’s at 20 per cent, five per cent or zero per cent, and those sales break the limit, then you’d have to register for VAT.

I know of no reason why light bulbs wouldn’t be standard-rated, but if you’re not registered for VAT, then you can’t charge your customers VAT on those sales.

You can pass on the VAT charge to your clients as part of what you charge them, but, as you’re not registered yourself, you can’t split out VAT as a separate line on your invoices and your customers can’t reclaim that VAT from HMRC if they are registered for VAT themselves.

Further reading on VAT

Emily Coltman

Morton Toy

Emily is Chief Accountant at FreeAgent Central Ltd and a graduate of of the University of Cambridge.

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