Charging and reclaiming VAT

We've talked about whether or not you need to register your business for VAT, and the different rates of VAT that apply to sales of goods and services in the UK.

So now you've bitten the bullet and registered your business for VAT, and you've taken advice from HMRC and/or your accountant and you know what rate of VAT to charge your customers.

How do you do that?

Read on!

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.

The rate of VAT you use for each item is the rate chargeable for that item.

For example, if I'm selling baby equipment, and I sell a carrycot and a Babygro, the carrycot would be charged at 5% and the Babygro at 0%, because children's clothing is zero-rated.

HMRC refers to all sales invoices that contain VAT as "VAT invoices".

There are rules about what information your VAT invoices must contain.

FreeAgent customer, using one of our pre-set invoice templates? Breathe a sign of relief and grab an extra cup of coffee because your invoices are set up as fully compliant VAT invoices. Just pick the right VAT rate when you add items to your invoices and FreeAgent will do the rest.

If you're not a FreeAgent customer, or you've designed your own custom invoice, have a read of HMRC's rules for what must be shown on a VAT invoice, and make sure yours are compliant - because if you get a visit from a VAT inspector, that's one of the things he/she will check.

On the VAT flat rate scheme?

You still have to charge output VAT to your customers in the normal way.

Get ready for MTD for VAT with our handy guides and resources →

Claiming back VAT on your purchases

OK, so you've charged output VAT to your customers.

What about the VAT you can see on the bills that your suppliers give you?

You may be able to claim back that VAT from HMRC. If you can claim it back, it's called input VAT.

When is it not possible to claim back VAT on suppliers' bills?

If there's no VAT on the bill in the first place

Nice try! The taxman isn't that generous.

If the bill has no VAT on it, for example if your supplier isn't registered for VAT and therefore didn't charge you VAT, or you're buying exempt goods or services, then you can't claim anything back.

If the kind of cost prevents you

There's some kinds of cost on which by definition reclaiming VAT is not allowed.

The classic 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've just got to take the full cost on the chin.

And when you're working out your business's profit to see how much tax you have to pay, you have to add back any business entertaining to that, because it’s not a tax-deductible expense. Bah humbug.

  • If you work with subcontractors, check the above link out. HMRC bury deep in a notice that if you treat a self-employed person like an employee for subsistence, then you can claim input VAT on the cost of feeding that self-employed person. So if your team contains a mixture of employees and subbies, and you all go out for a team meal, you can claim input VAT on the cost of everyone’s food and drink. Crafty, huh?

If you don’t have a valid VAT invoice from your supplier

Supplier didn't give you a valid VAT invoice?

Out of luck - you can't claim the VAT back.

Don't be tempted to try, because if you get a visit from a VAT inspector, they'll do spot-checks on the bills your suppliers have given you, to make sure they're valid VAT invoices.

There are some exceptions though. For example, if you just get a till receipt with the supplier's VAT number on it, you can claim back VAT so long as there is actually VAT on the items.

If you're on the VAT flat rate scheme

The flat rate scheme works differently. You don't reclaim input VAT except on large capital assets.

More about the flat rate scheme next week.

Businesses who aren't registered for VAT

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

No, none at all.

So remember that if your business's current and prospective customers are the general public, it's worth considering keeping your business small and staying below the registration limit.

That's because if you charge VAT to a customer who isn't registered for VAT, they can't claim it back - they have to bear the full cost without any hope of claiming it back.

Let's take an example.

George is the very nice guy who comes and does the hard work in my mum's garden.

He charges £10 per hour. So for a full day that would be £70.

He's not registered for VAT.

But if he were registered for VAT, applying the standard rate he would be charging my mum £70 x 1.2 = £84, using the 20% standard rate that came in from 4th January 2011.

Mum is not registered for VAT either, because she's an individual, and only businesses can register for VAT.

So if George registered for VAT, assuming he wasn't prepared to put his prices down and absorb the extra cost himself, for a day's gardening, Mum would have to pay 20% more - £84 instead of £70.

Unless George is a really good gardener, she'd stop using him and start using someone who isn't registered for VAT.

So if your business's customers are the general public, try not to have to register for VAT, otherwise you'll have to drop your prices or risk losing your customers.

Got questions?