The first question to ask is whether or not you should be registered for VAT. If your turnover exceeds the limit (currently £54,000) then you have no choice. However, even if your income doesn’t reach this level you may still want to register as it can be to your advantage. You can request to register voluntarily.
This is a very basic guide that deals with the essentials. I have provided more detail where I think it is of particular relevance to photographers.
At the very least you should obtain the following VAT publications from HM Customs and Excise:
- The VAT Guide � VAT Notice 700/2000
- Keeping Records and Accounts � VAT Notice 700/12/2000
- The Ins and Outs of VAT – VAT Notice 700/15/2000
- Motoring Expenses – VAT Notice 700/64/96
- Cash Accounting – VAT Notice 731
There are also two videos available, one an introduction and one a guide to record keeping and filling in your return.
All these publications are freely available. They can be viewed or ordered on line from Customs & Excise. Detailed other information is also available on their site.
You can apply to HM Customs and Excise for voluntary registration, even if your turnover is not at the required level. Why would you want to do this and subject yourself to the necessary record keeping and form filling? Well it could save you a lot of money.
If you are registered for VAT, it means that you can reclaim the VAT on all your VAT purchases. This will save you 17.5 % on most purchases. You must, however, add VAT to all your UK sales. This increases your prices by 17.5 , although VAT registered clients will be able to claim the same amount back from their tax return.
The decision to register rests on the nature of your client base. If the majority of your clients are VAT registered, then it is likely that you will be better off if you register. VAT registered clients merely reclaim the VAT in the same way that you do on your purchases and are therefore no worse off. However, if your clients are not businesses but individuals, then it will effectively put up your prices. If you are reading this site, then I assume that you are, or plan to be, an editorial photographer and your clients will be VAT registered.
As soon as you are registered you are issued with a Certificate of Registration, which contains details of your VAT registration number.
You will receive a VAT Return to complete every three months. If you are late in submitting your return and payment you will be subject to penalties (usually you get one warning). See VAT Notice 700/12 � Filling in your VAT return
You should notify your VAT Office if any of the following changes:
- Bank Account Details
- Change in Business Status (e.g. Sole Trader to Limited Company)
- Change of Trading Name
- Change of Business Activities
- Ceased Trading
- Transfer of Business
One thing to understand clearly is that VAT and The Inland Revenue are SEPARATE. On certain issues they have different requirements � motor vehicles in particular.
You can choose to adopt cash accounting if your annual turnover is below �350,000, which I�m guessing includes most of us. This means you pay VAT based on what you have actually received and paid in the VAT quarter i.e. you do not have to pay VAT that you have not been paid yet. I suggest that you adopt this method. There is no need to apply. See VAT Notice 731
How does it work ? In very simple terms you pay the VAT office the balance of VAT you have been paid by your customers, less the VAT you have paid to your suppliers.
VAT on sales is known as Output VAT. VAT on purchases is known as Input VAT.
You have to the end of the month following the end of the VAT period to pay your net VAT liability.
Keeping records and accounts
You must keep records of all supplies you make and receive and a summary of each VAT Period. Records must be kept for six years.
When you make a supply you must issue a tax invoice within 30 days. It must include the following:
- An identifying number. This must be unique. I would suggest you are systematic in this. E.g. First two digits Year, Second two digits month, Third two digits sequence. Your first Invoice for August 2001 would therefore be � 01/08/01 and then so on. Providing you don�t stay in business for more than a hundred years all your numbers will be unique.
- Your name, address and VAT registration number.
- Time of supply.
- Date of issue.
- Your customer�s name and address.
- Type of Supply.
- A description of the goods/service supplied.
- For each description:
- Quantity of goods or extent of the services.
- Charge made, excluding VAT.
- Rate of VAT.
- Total Charges made, excluding VAT.
- Each Rate of VAT charged and amounts charged at each rate.
- Rate of any cash discount offered.
- Total VAT payable.
In order to reclaim VAT on your purchases they must be for business use and supported by a proper Vat invoice as detailed above (Tax Invoice/Sales). For purchase less than �100 detailed invoices are acceptable, but should still show:
- Your Name and address.
- Time of supply.
- A description of goods.
- Charge made including VAT.
- Rate of VAT.
This can be a pain for low value sales. It is likely that you will get away with an ordinary receipt provided it has a VAT number on it.
In certain instances (eg parking) an ordinary receipt is acceptable.
This is the date you send or make available the goods or service to the customer. If you receive payment or issue an invoice before this then the earliest date becomes the tax date.
Rates of VAT
There are a number of VAT rates. At the time of writing, they are:
- Standard Rate: This applies to most supplies and is currently 17.5. So if you charge a customer �100 for a picture, you must add �17.50 (�100×0.175) VAT to make a total invoice for �117.50. If you want to calculate the VAT element of gross figure then do the following calculation: amount/1175×175.
- Zero Rated: Judging from posts on the EPUK web site, people assume that items that are Zero Rated are not Vat sales � this is not so. It is just that the rate of VAT on them is 0%. They should be included along with standard rated items on the VAT return. Goods that are generally zero VAT rated are:
- Books and Mags.
- Train, bus and Tube Fares.
- Some Exports (When selling to other EU countries – you must enter the customer�s VAT number on the invoice to rate VAT at zero). See VAT notice 703 for more detail. If you sell overseas a lot, then I suggest you get clear written guidance from your VAT office. See the section on completing your VAT Return.
See The VAT Guide Appendix A for more details on Zero Rated items.
Bad Debt Relief
If someone fails to pay you then you it is important that you follow the procedure laid down. If you are cash accounting you will not have paid the VAT, so there is no need to claim relief. If you are not cash accounting then you can claim relief after six months but see VAT Leaflet 700/18 for procedures.
See VAT Notice 700/64.
You cannot claim Input VAT on the purchase of most ordinary business cars. You may be able to claim Input VAT on the purchase of a van (there are strict definitions of what constitutes a business van, do not try and get away with calling your people carrier a van). A man who claimed he used hi Lamborghini only for business (delivering cigarettes to vending machines) was successful in claiming VAT, but has just lost on appeal. See Appendix A of VAT Notice 700/64.
Travel from home to your normal place of business is not a business journey. This would apply for example to a studio-based photographer.
You can claim back input VAT on the following:
- The lease of car for exclusive business use. 50% of VAT if not exclusive business use.
- Vehicle accessories (provided for genuine business use).
- Repair and Maintenance Charges. Important – you can claim all the Input VAT, regardless of percentage of business use on any vehicle you own and use for business. This does not mean you can claim all your repair and maintenance charges as a business expense, only the business proportion (see my comment on the Inland Revenue and HM Customs and Excise being separate). If you are claiming the mileage rate in your tax accounts then this is not relevant.
- Fuel � See below for options.
You can choose to reclaim all the Input VAT on your fuel, including for private motoring. In this case you must then pay a Road Fuel Scale Charge for each car you claim Input VAT for fuel on. You need to calculate whether you will do sufficient private mileage to make this worth your while. Although word on the street (alright accounting web-sites) have that scale charges are going to continue to be subject to big increases. It would also save you the bother of a keeping a mileage log, but you may be doing this for your income tax records anyway. The Road Scale Charges are availabe from your local VAT office.
The alternative is to use your mileage record and claim the Input Vat on your fuel (remember you can claim it all on servicing) proportionate to business/private use.
The VAT Return
The unavoidable document of dread is actually straightforward. See leaflet 700/12 � Filling in your VAT return. This is also available as an audio cassette for anyone who has trouble sleeping.
I will take you through it box by box, assuming that you are using cash accounting:
- Box 1 VAT due in this period on sales or other outputs. Include the invoices you have received payment for in the VAT period.
- Box 2 VAT due in this period on acquisitions from other EC Member States. If you have purchases something from another EC Member State, you may have received it with VAT Zero Rated (they would need your VAT number to do this). You must add VAT at the appropriate rate for the goods in your accounts. (You get it back in Box 4).
- Box 3 Total VAT due (The sum of Boxes 1 & 2).
- Box 4 VAT reclaimed in this period on purchases and other inputs (including acquisitions from the EC). This is the VAT you have paid on your business purchases in the period. Include Credit Card payments even if you haven�t paid it.
- Box 5 Net VAT to be paid to Customs or reclaimed by you. The difference between boxes 3 & 4. This is what you need to pay within 30 days of the period end.
- Box 6 Total value of sales and all other outputs excluding any VAT. Include Standard and Zero rated items, but not exempt items. The figure should be NET of VAT. You should do a quick check to see that Box 1 is approximately 171�2% of this box. If there is a disparity then it is likely that you have made a mistake. You should find the mistake and correct it, not doing so is a sure-fire way of attracting a VAT visit.
- Box 7 Total value of purchases and all other inputs excluding any VAT. . Include Standard and Zero rated items, but not exempt items. The figure should be NET of VAT. You should do a quick check to see that Box 4 is approximately 171�2% of this box. See my comments on Box 6.
- Box 8 Total value of all goods and related services, excluding any VAT, to other EC Member States. Note that this is for goods. A commission for a foreign magazine is a service and does not need to be included, nor do the expenses associated with the commission. The inclusion of the supply of stock images for re-use is debatable (especially if digital) and we did indeed have a fascinating debate about it on EPUK some time back. If this is something you do regularly then I would seek written advice from your local VAT Office.
- Box 9 Total value of all goods and related services, excluding any VAT, from other EC Member States. Purchases of goods from other EC Member States.
A very important aspect of VAT is reconciling your VAT Return with your accounts at the end of each quarter. When doing your accounts you should enter VAT into a separate column (accounting packages will do this for you).
At the end of the VAT Quarter you should do the following calculation on balances at the final date of the VAT Period:
- Balance of VAT Account �2000
- Less Output VAT on unpaid Sales �500
- Plus Input VAT on unpaid Purchases �100
- Balance �1600 � This should agree with the VAT Return.
If it doesn�t you should find out why. First of all check your arithmetic and if you are using a spreadsheet your formulas. If it still doesn�t work then look at your previous return. You should always keep a print/hard copy of the transactions included in the return. The VAT Office will expect to see this if they visit and it is very useful. Do the same reconciliation calculation again for the previous period and see if it still works. If it doesn�t check the hard copy with the report with what you have now and see if anything has changed. The most likely culprit is that you have belatedly added something for the VAT Period after doing your return. If you notice this when you do it try and keep a record as it will save you a lot of agony later.
Keep a record of the reconciliation. If the VAT Office visit then you may need to prove the balance of each return.
If not using accounting software, then I suggest you set up a method that makes this process easy for you. E.g. A spreadsheet system that only books items as they are paid. You will need to remember to include unpaid items at your financial year-end for your Tax Return.
All the advice is given in good faith, but is given as a guide only. Individuals should seek the necessary advice for their own circumstances as required. No liability is accepted for any losses incurred due to the advice given in this guide. VAT is a complex subject and for the sake of brevity this advice only deals with subjects superficially.