Charging and reclaiming VAT

If your business is registered for VAT and you know what rate applies to your goods or services, you’re ready to start charging VAT.

Charging output VAT to your customers

The VAT you charge to your customers is called output VAT. When your business is registered for VAT, you need to add VAT to each VATable item on each of your sales invoices. VATable items are any goods or services that are subject to VAT at the standard, reduced or zero rate.

The rate of VAT you apply to each item is the rate that HMRC stipulates that you need to charge for that item. For example, if a business sells baby equipment and sells a carrycot and a baby grow, the carrycot would be charged at 5% and the baby grow at 0%, because the chargeable VAT for each of these items is different.

HMRC refers to all sales invoices that contain VAT as "VAT invoices". There are rules for what must be shown on a VAT invoice, so make sure yours are compliant - if you get a visit from a VAT inspector, that's one of the things they will check.

If you’re using FreeAgent’s digital VAT software you can choose from a selection of pre-set invoice templates that are built to be HMRC compliant. Just pick the right VAT rate when you add items to your invoices and FreeAgent will do the rest.

Claiming back VAT on your purchases

Now you know how to charge output VAT to your customers, what about the VAT you can see on the bills that your suppliers give you? If your business is registered for VAT, you may be able to claim back the VAT from HMRC as input VAT.

When can you not claim back VAT on purchases?

There are some types of costs on which reclaiming VAT is not allowed. A classic example is business entertaining. If you take non-employees (for example, current or prospective customers) out for a meal, the restaurant will charge you VAT - but HMRC says you can't claim that VAT back as input VAT. You simply have to take the full cost on the chin.

If a supplier doesn’t give you a valid VAT invoice, then in most cases you can’t claim the VAT back. There are some exceptions (for example, if you only get a till receipt with the supplier's VAT number on it, you can claim back VAT for VATable items), but don’t try to claim back VAT on any invoices or receipts that you think may not be valid. If you get a visit from a tax inspector they'll check the bills your suppliers have given you, so if you’re in any doubt be sure to check with an accountant before claiming.

If a bill has no VAT on it (for example if your supplier isn't registered for VAT and therefore didn't charge you VAT) or if the bill relates to VAT-exempt goods or services, you won’t be able to claim any VAT back.

The VAT Flat Rate Scheme also works differently. You don't reclaim input VAT except on large capital assets. You can find out more in our guide to using the Flat Rate Scheme.

Charging and reclaiming VAT if your business isn’t registered

If your business isn't registered for VAT, then you don't have to charge VAT to your customers - but this also means that you can't claim any VAT back.

Remember that if your business's current and prospective customers are the general public, it's worth considering staying below the VAT registration limit because if you charge VAT to a customer who isn't registered for VAT, they can't claim it back.

Let's take an example:

A VAT-registered gardener who charges £70 for a full day’s work would apply the standard rate of 20% VAT to the corresponding invoice.

This means that the gardener’s customers who are members of the public - and therefore not registered for VAT - would have to pay £84 (£70 x 1.2 = £84) instead of £70 for a full day’s work.

As a result, this gardener may struggle to win business against a competitor who isn't registered for VAT.

Charging and reclaiming VAT can be complicated, but FreeAgent can help! Take a closer look at the features of our digital VAT software to find out more.

Got questions?