Contractors’ Questions: Should I register for VAT?

Contractor’s Question: I’m new to Value Added Tax issues so need some help with VAT and invoicing. I have been commissioned directly (by the client no agency involved) to provide some project work which has been signed off for budgetary purposes. The brief will, say, cost me £5,000 to deliver. However, add in the payable VAT and it will probably come in at, say, £6,000. So how do I charge and state this on my invoice to the client if I’m not VAT-registered? Or would it be easier if I just registered for VAT instead?

Expert’s Answer: First and foremost , you must not charge or state VAT on any invoice you issue if you are not registered for VAT. Guidance from HM Revenue & Customs is very clear on this.

However, you should not be ‘out of pocket’ for this amount, as assuming you did not quote £5,000 for the work, you can invoice the client for the full £6,000, as the total cost of the work completed.

If you have already quoted £5,000 then you have two options. Either shoulder the costs yourself and put it down to experience, or go back to the client and explain that costs are higher than initially quoted and try to renegotiate. For the future, it would of course be advisable for you to research fully all costs involved before quoting an amount or fee you can deliver those services for.

However, bear in mind that there are often benefits to voluntarily registering for VAT even if your turnover has not reached the VAT registration threshold of £70,000. It may therefore be worth talking to an accountant or tax adviser to see if there is a benefit to your business in doing so. 

Looking at your circumstances, that benefit could be that you would be able to reclaim the £1,000 of VAT costs. Generally, you would be able to reclaim VAT on goods you bought up to four years before registering for VAT, assuming the goods were bought by you; the goods are VAT-able for business purposes and that you still hold the goods.

However, even if you were VAT-registered, you would not be able to reclaim the VAT if the goods have been completely used up before VAT registration (such as the case for petrol/electricity); if you have already sold or supplied the goods, or if the goods relate to VAT exempt supplies.

Remember, after VAT registration you must complete and submit VAT returns at regular intervals, and make any payments due. As VAT-registered, you must also keep all VAT records and issue VAT invoices.

If these requirements seem too onerous, and your situation of under-pricing will not be repeated, it may make more sense for you to absorb the loss and stay outside of VAT. However, if you will soon be required to register for VAT anyway, or envisage your VAT-related payments and work increasing, it may be worth taking the initiative and registering for VAT voluntarily.

The expert was Alasdair McGill, managing director of Freelance World, an accountancy firm specialising in tax services to freelance contractors and the self-employed.