VAT
and the digital future of tax
Should you register for VAT? Felicity Martin is here to help you make a decision
A
t the end of last year I contributed
to a discussion about Value Added
Tax (VAT) on the OWPG Forum.
This led the OF editor to ask me if I
would write about being registered for
and paying VAT. It seems that few OWPG
members are registered, although it might
be financially worthwhile for more to
consider it. I’m no expert in VAT, but I do
now have ten years experience of dealing
with it.
In the 2018/19 financial year I
reclaimed over £1000 of VAT on
purchases, getting back the tax I’d shelled
out on a couple of large items and many
other smaller expenses. I also paid nearly
£2000 of VAT on sales. That might sound
like a negative balance, but virtually none
of the VAT I handed over came out of my
own pocket, instead it was ‘added value’
paid by those buying my services, as I’ll
explain.
Tied up with the issue of VAT is how
you do your bookkeeping. If your system is
manual – based on keeping spreadsheets
and writing Word document invoices, as
mine was originally – you may want to
look away now because VAT accounting
would entail a lot more work. Mind
you, you should be aware that you may
be forced to revise your system before
too long, as the government’s digital
programme is rolled out beyond VAT
registered businesses. More on this below.
Since most members are not VAT
registered, it might be easier to relate
to the subject if I describe the main
steps in my journey, starting from the
beginning of my freelancing career. Over
the years my attitude to VAT has changed
significantly. It has transmuted from
a scary and confusing spectre to just
another bit of my bookkeeping – one that
only takes me a few extra minutes four
times a year.
As for many, I knew little about
‘accounting’ when I left my salaried job
over 20 years ago. Going on a Business
Gateway Bookkeeping course helped and
provided me with a paper based system
of keeping records. In my first year, I
used an accountant to produce my annual
accounts and tax return. I have continued
to do so ever since – at a cost of about
£200 a year. Although my understanding
14 Outdoor focus | spring 2020
is now better I still struggle with
Depreciation (which can’t be set against
tax owing) and Capital Allowances (which
can, but is subject to annual changes
in rates). I think the saving of time and
stress is worth it.
Standard VAT
W
Under full VAT
accounting,
you need keep
records of both
the VAT you
add to your
sales and the
VAT you pay on
your business
purchases
hen I began freelancing and
submitting annual tax returns
to HM Revenue and Customs
(HMRC), I also learnt a bit about VAT
– enough to put me off going near it!
Under full VAT accounting, you need
keep records of both the VAT you add to
your sales and the VAT you pay on your
business purchases (and keep receipts
itemising the VAT). The amount you either
pay to or claim back from HMRC is the
difference between the two.
If I had thought more deeply about
it, I would have seen that it could be
of financial benefit. Almost all my
customers – publishers and other large
organisations – were VAT registered, so
it was immaterial to them if I added VAT
to my invoices (or received it through self
billing invoices they generated). They
would simply claim that VAT back on their
returns. On the other side of the equation,
I would have been able to claim back VAT
that I was charged on purchases for my
business.
It would be a different story if a large
proportion of my customers were private
individuals or small organisations that
were not VAT registered. In that case, I
would still have to collect and pay VAT
on the sale, which would mean giving the
relevant proportion of my agreed fee to
HMRC. For instance, at the current 20%
VAT rate, if I receive £60 for giving a talk,
I only keep a fee of £50 with £10 of it
being VAT that I pass on to HMRC.
When I started freelancing, I was
finding it hard enough to keep manual
records. It was easy for errors to creep
in through incorrect formulas or while
copying figures from one place to another.
I didn’t fancy keeping more columns on
my spreadsheets for VAT, nor calculating
an addition of 17.5% (which was then the
rate of VAT) to all my invoices.