VAT Guide for Freelancers in United Kingdom (UK)

It doesn't matter where you're based; you have to deal with British VAT rules if you have clients in the United Kingdom. The VAT policy in the UK was first implemented in 1973 as part of their entry into the European Union. However, following their exit from the EU, the UK also left the EU VAT regime on 1st January 2021 and has been free to adopt its own VAT rules and policies.

Currently, Her Majesty’s Revenue and Customs (HMRC) is in charge of the VAT system in the United Kingdom. It is also responsible for regularly publishing and updating content related to VAT management in the UK.

If you are a freelancer or looking to become a freelancer in the UK and want to learn more about British VAT and the rules surrounding it, you're in the right place. We've created this guide with everything you need to know about the VAT system in the UK. Let's get started!

What are the VAT Rates in the UK?

There are three different VAT rates levied in the UK, and freelancers must charge the amount that applies to their products and services.

• The Standard Rate - Unless your goods or services fall in the reduced rate or zero-rate categories, you should charge a standard VAT rate of 20%.
• The Reduced Rate - The Reduced rate, set at 5%, applies to products such as children's car seats, electricity, specific social housing, natural gas, some social services, and district heating supplies for residential use only. It also includes things like household energy-saving installations, domestic LPG and heating oil, repairs and renovations for some private dwellings, and medical equipment for the disabled.
• The Zero Rate - When items are zero-rated, they are still taxable, but the rate of VAT you must charge is 0%. This rate is levied on printed books (except e-books), newspapers and periodicals, social housing, household water supplies, domestic refuse collection, food (except pre-cooked food), prescribed pharmaceutical products, seed supplies, and so on. You should still record sales of such goods and services and create a report based on your returns.

Some things, such as postage stamps, financial and property transactions, are exempt from VAT.

When to Register for VAT in the UK?

You are required to register for VAT if your yearly taxable turnover exceeds £85,000. This amount is the VAT threshold and is the total of everything sold that is not VAT exempt. If your turnover doesn't exceed this amount, you can still register for VAT voluntarily. 

Regarding the threshold, you must register for VAT if:

• you expect your VAT taxable turnover to be more than £85,000 in the following 30-day period, or
• your business had a VAT taxable turnover of more than £85,000 over the last 12 months.
  
  

If you realize that your turnover will exceed £85,000 in the following 30-day period, you must register by the end of that period. Failing to do so will result in you paying a fine to compensate for your lapse!

It's important to note that this threshold is subject to change; therefore, you should frequently check the HMRC website for updates and other factors influencing when to register for VAT.

How to Register for VAT in the UK

When registering for VAT in the UK, you must be aware of the following:

• You are required to provide information, including your annual revenue, business activity, and bank account information.
• The 'effective date of registration' is the day you registered. From this date forward, you must pay VAT regularly on time to the HMRC.
• You aren’t required to hire a fiscal representative or agency to register you for VAT.

Registering Online

• Register Directly - Most freelancers can register for VAT online. You can register and create an online account, also known as a Government Gateway account, which is required in order to submit VAT returns to HMRC.
• With the help of an agent - You can hire an accountant (or agent) to handle your VAT returns and dealings with HMRC. You can sign up for a VAT online account by choosing the 'VAT submit returns' option once you receive your VAT number from HMRC.

When You Cannot Register Online

You must register by post if you're unable to do so online. Register using form VAT1 if:

• you want to apply for a 'registration exception'
• you're joining the Agricultural Flat Rate Scheme
• you're in the EU and 'distance selling' to Northern Ireland
  
  

You must register using form VAT1B if you import ('acquire') goods into Northern Ireland worth more than £85,000 from an EU country and form VAT1C if you're disposing of assets on which 8th or 13th Directive refunds have been claimed.

You can then sign up for a VAT online account by choosing the 'VAT submit returns' option once you receive your VAT number from HMRC.

If you want to hire an accountant or agency to handle all your VAT returns and dealings with the HMRC, Xolo provides services like Xolo Go and Xolo Leap, which help with precisely this and any other VAT concerns you may have.

Financial Obligations of VAT Registered Freelancers in the UK

Registering for VAT is only the first step. From the day of your effective registration date, you must:

• Keep track of all purchases and transactions,
• Charge the correct VAT rate,
• Pay any VAT owed to the HMRC,
• File VAT returns, and
• Maintain accurate VAT records and a VAT account.
  
  

In compliance with VAT laws, all your records (or invoices) should include the following information:

• Your business name and address
• Your VAT number
• Invoice date
• Invoice sequencing number
• Description of the goods or services
• Rate of VAT applied to each item
• Total amount including VAT
  
  

Additionally, most registered enterprises exceeding the VAT threshold are required to adhere to the 'Making Tax Digital for VAT' rules by maintaining some records digitally. The extensive list of records you need to keep is included on the website. 

If this sounds overwhelming to you, don't worry. We can help! Xolo automatically generates, sends, and stores all your invoices digitally, so you won't have to worry about missing any steps or misplacing any documents.  

How Can Xolo Help?

Learning about all the British VAT guidelines can be challenging, especially if you’re a sole proprietor and in charge of several aspects of your business. Luckily, at Xolo, we offer a range of solutions that can handle all the paperwork and legal jargon, allowing you to focus on your core competencies.

Xolo Go is a quick and efficient way for freelancers who may or may not have a registered LLC or sole proprietorship to invoice clients legally. 

• Signing up takes only 10 minutes, and once you do, taxation, corporate compliance, and all the tricky VAT calculations are all automatically taken care of in the background!
• We charge a flat rate of 5% from every withdrawal to your personal bank account. No surprise fees, no contracts, and no BS.
  
  

Xolo Leap is the easiest and most effective way to create your own company through Estonian e-Residency! Reduce time spent on mundane business administration and focus on what you do best!

• We offer different tiers of service depending on the solopreneur's (or as we call them, Xolopreneur's) individual needs.
• Once you get your business set up with Xolo Leap, you can run it from anywhere in the world! So whether you’re a freelancer looking to gain access to the European market or a digital nomad who can’t be tied down - this is the place for you! 

Simply put, we do the hefty work for you so that you can enjoy the freedom of freelancing. So connect with us immediately, and we’ll help you get your one-person business up and running in the UK in no time!