VAT and Sales Tax Rules for Freelancers
TL;DR:
- You must charge VAT if your annual revenue exceeds your country's threshold (£85,000 in the UK)
- Registration is required before you can add VAT to invoices and file returns
- Different regions have different rules – know your local requirements
- You can either absorb VAT costs or pass them to clients in your pricing strategy
- Registered freelancers can usually reclaim VAT on business expenses
Most freelancers start worrying about VAT too late. The rules kick in based on your revenue, not when you feel ready for them.
Understanding VAT Registration Thresholds
Your obligation to charge VAT depends on how much you earn. Each country sets a revenue threshold that triggers mandatory registration.
In the UK, you must register for VAT if your taxable turnover exceeds £85,000 in any 12-month period. Other countries have different limits. France sets theirs at €34,400 for service providers, while Germany requires registration from your first euro of revenue in some cases.
Check your threshold annually. Revenue can creep up faster than expected, especially if you land a few good contracts. Missing the registration deadline means potential penalties and back-payments.
The Registration Process
Most tax authorities offer online registration. You'll typically need:
- Personal identification documents
- Proof of business income or projected earnings
- Bank details for direct debit payments
- Your business address
The process usually takes 2-4 weeks. Don't wait until you hit the threshold – you can register voluntarily if you're close or want to reclaim VAT on business expenses.
Adding VAT to Your Invoices
Once registered, every invoice needs to show VAT clearly. Your invoicing software should handle the calculations automatically, but double-check the basics:
- Your VAT registration number must appear on invoices
- Show the VAT amount separately from your base rate
- Use the correct VAT rate (20% standard rate in the UK, but some services qualify for reduced rates)
Tell existing clients about the change before sending VAT-inclusive invoices. A quick email explaining the legal requirement usually prevents confusion.
How VAT Affects Your Pricing Strategy
You have two options when VAT registration kicks in: absorb the cost or pass it to clients.
Absorbing VAT costs means keeping your quoted prices the same but taking home less money. If you normally charge £1,000, you'd still quote £1,000 but only keep £833.33 after VAT.
Passing VAT to clients means your £1,000 quote becomes £1,200 including VAT. The client pays more, but your take-home stays the same.
Most B2B clients expect VAT-registered suppliers and can reclaim the VAT themselves. Consumer clients feel the full impact of price increases more acutely.
Review your client mix before deciding. If most of your work comes from VAT-registered businesses, passing on the cost usually works fine. If you work mainly with small businesses or consumers, you might need to absorb some or all of the VAT to stay competitive.
Reclaiming VAT on Business Expenses
VAT registration has an upside – you can reclaim VAT paid on business purchases. This includes:
- Office equipment and software subscriptions
- Professional development courses
- Business travel and accommodation
- Marketing and advertising costs
Keep all VAT receipts and match them to your records. The VAT you reclaim reduces what you owe HMRC each quarter.
TL;DR:
- You must charge VAT if your annual revenue exceeds your country's threshold (£85,000 in the UK)
- Registration is required before you can add VAT to invoices and file returns
- Different regions have different rules – know your local requirements
- You can either absorb VAT costs or pass them to clients in your pricing strategy
- Registered freelancers can usually reclaim VAT on business expenses
FAQs
Do I have to charge VAT as a freelancer?
Yes, if your annual revenue exceeds your local threshold. In the UK, that's £85,000 in any 12-month period.
How do I know when I need to register for VAT?
Monitor your revenue monthly. You must register within 30 days of exceeding the threshold. Check your local tax authority's website for current limits.
Can I reclaim VAT on business expenses as a freelancer?
Yes, once registered you can reclaim VAT on most business-related purchases. This often offsets some of the administrative burden of VAT registration.
What happens if I miss the VAT registration deadline?
You'll face penalties and may need to pay back-dated VAT even though you didn't charge it to clients. Set calendar reminders well before you hit the threshold.
Jargon Buster
VAT (Value-Added Tax) – A tax added to most goods and services that VAT-registered businesses charge to customers
Sales Tax – A tax on sales transactions, usually collected at the point of purchase (more common in the US)
Threshold – The annual revenue limit that triggers mandatory VAT registration in your country
Taxable turnover – Your total business income from VAT-taxable supplies, excluding VAT itself
Wrap-up
VAT registration changes how you price and invoice, but it doesn't need to derail your business. Plan ahead by tracking your revenue against local thresholds and decide early whether you'll absorb VAT costs or pass them to clients.
The administrative burden is real – quarterly returns, record keeping, and updated invoices all take time. But being able to reclaim VAT on business expenses often helps balance the scales.
Ready to get your business finances properly organised? Join Pixelhaze Academy for practical guides on everything from invoicing to tax planning.