VAT for Freelancers Explained

What Is VAT?

Value Added Tax (VAT) is a consumption tax charged on most goods and services sold in the UK. As a freelancer, understanding VAT is essential because it directly affects your pricing, invoicing, and compliance obligations with HMRC.

VAT is collected at each stage of the supply chain. When you're VAT registered, you charge VAT on your services (output VAT) and can reclaim VAT on business purchases (input VAT). The difference between what you collect and what you pay is what you owe to (or reclaim from) HMRC.

Not all freelancers need to register for VAT immediately. Whether you must register depends on your annual taxable turnover, which we'll explore in detail below. However, understanding VAT fundamentals is important regardless of your current registration status, as your business may grow past the threshold.

VAT Rates in the UK

The UK has three VAT rates, and understanding which applies to your services is essential for correct invoicing:

Standard Rate: 20%
This applies to most goods and services in the UK. As a freelancer, the majority of your work — whether design, development, consulting, writing, or marketing — falls under the standard rate. If you're unsure, assume standard rate applies.

Reduced Rate: 5%
This applies to specific goods and services, including some energy-saving materials, children's car seats, and certain health products. Most freelance services do not qualify for the reduced rate, though some specialist contractors may encounter it.

Zero Rate: 0%
Zero-rated goods are still VAT-taxable, but at 0%. This includes most food, children's clothing, books, and newspapers. Some digital publications may qualify for zero rating. Importantly, zero-rated businesses can still reclaim input VAT on purchases.

Exempt and Outside the Scope
Some services are VAT exempt (insurance, finance, education) or outside the scope of VAT entirely. If your services are exempt, you don't charge VAT but also cannot reclaim VAT on related purchases. This differs from zero-rated supplies where you can reclaim input VAT.

The VAT Threshold

The VAT registration threshold is the annual taxable turnover above which you must register for VAT. For the 2024/25 and 2025/26 tax years, this threshold is £90,000.

You must register for VAT if:

• Your VAT taxable turnover exceeded £90,000 in the last 12 months (rolling, not tax year)
• You expect your turnover to exceed £90,000 in the next 30 days alone
• You take over a VAT-registered business

The threshold is based on your taxable turnover, which includes all standard, reduced, and zero-rated sales. It does not include exempt income or income from outside the UK (though different rules apply for overseas sales).

Monitoring your turnover:
HMRC looks at rolling 12-month periods, not fixed tax years. This means you should track your turnover regularly — ideally monthly — and project forward. Getting caught by the threshold unexpectedly can mean backdating VAT charges and complicated client communications.

How VAT Works for Freelancers

Once registered, VAT affects your business in four main ways: pricing, invoicing, record keeping, and returns.

Output VAT (what you charge):
You add VAT to your fees when invoicing VAT-taxable supplies to UK clients. If your day rate is £500, you invoice £500 + £100 VAT = £600 total. The £100 is output VAT that you'll pay to HMRC.

Input VAT (what you reclaim):
When you purchase goods or services for your business from VAT-registered suppliers, you pay VAT. You can reclaim this input VAT against your output VAT liability. If you collected £2,000 in output VAT but paid £500 in input VAT on business expenses, you owe HMRC £1,500.

The VAT calculation:

• Total Output VAT collected from clients
• Minus Total Input VAT paid on business purchases
• Equals Net VAT owed to (or reclaimable from) HMRC

In some quarters, particularly when you've made significant business investments, your input VAT may exceed output VAT. In this case, HMRC will refund the difference.

Charging VAT to Clients

How you handle VAT with clients depends on several factors, including whether they're VAT registered, where they're located, and the nature of your services.

UK VAT-registered clients:
Charge VAT as normal. Your client will reclaim the VAT you charge, so it's cost-neutral for them. Always show VAT clearly on your invoice.

UK non-VAT-registered clients:
You still charge VAT. However, they cannot reclaim it, making your services 20% more expensive to them. This is why some freelancers below the threshold choose not to register voluntarily — it keeps them competitive for price-sensitive clients.

EU and international clients:
Post-Brexit rules require careful attention. Generally, services to business clients outside the UK are outside the scope of UK VAT (you don't charge VAT). Your client may need to account for VAT under their local reverse charge mechanism. Always verify the rules for your specific services and client location.

VAT Returns Explained

VAT-registered businesses must submit VAT returns to HMRC, typically quarterly. Since April 2019, returns must be filed digitally through Making Tax Digital (MTD) compatible software.

VAT return periods:
Standard VAT returns are quarterly. You can apply for monthly returns if you regularly reclaim VAT, or annual returns if your turnover is below £1.35 million and you're on the Annual Accounting Scheme.

The VAT return process:

1. Calculate total output VAT charged to customers
2. Calculate total input VAT on business purchases
3. Complete and submit VAT return through MTD software
4. Pay any VAT owed (or receive refund if claiming back)

Deadlines:
VAT returns and payments are due one month and seven days after the end of the VAT quarter. For example, if your quarter ends 31 March, your return and payment are due by 7 May.

Late filing and payment penalties:
HMRC operates a points-based penalty system. You receive penalty points for late returns, and a £200 penalty when you reach the threshold (4 points for quarterly returns). Late payments also accrue interest and penalties based on how late and how much is owed.

Record Keeping Requirements

VAT registration brings strict record-keeping obligations. HMRC can request records going back six years, so maintaining organised, accurate records is essential.

Records you must keep:

• Copies of all sales invoices issued
• Copies of all purchase invoices received
• Credit notes and debit notes
• Records of goods or services bought and sold
• Bank statements and payment records
• VAT account showing calculations
• Any adjustments or corrections made

Digital record-keeping (MTD):
Under Making Tax Digital, your records must be kept digitally and linked to your VAT return software. Manual spreadsheets are allowed only with "digital links" to your return software — meaning no manual retyping of figures.

Invoice requirements:
VAT invoices must include your VAT registration number, invoice date, unique sequential number, customer details, description of goods/services, VAT rate applied, and amounts excluding VAT, VAT amounts, and totals including VAT.

Understanding VAT is fundamental to running a compliant freelance business in the UK. Whether you're approaching the threshold or considering voluntary registration, having a solid grasp of how VAT works will help you make informed decisions about pricing, cash flow, and compliance.