If you’re a freelancer in the UK, one of the perks you might not be aware of is the ability to claim VAT back on your business expenses. If you’re charging VAT on your services, you can also reclaim the VAT you pay on things like office supplies, software, and even business travel.
But the process can seem a bit tricky if you’re new to VAT.
In this guide, we’ll break it down step by step, answering all the key questions around how freelancers can claim VAT back on expenses.
You’ll get to know:
- Who Can Reclaim VAT?
- Which Businesses Are Not Eligible For VAT Reclaim?
- How The VAT Reclaim Process Works?
- And Much More!
Let’s get started!
What is VAT in UK?
VAT is a tax that’s added to the price of most goods and services in the UK. As a freelancer, you will need to charge VAT on the services you provide if you are VAT registered. In return, you can also claim VAT back on your business expenses.
It’s essentially a system where businesses collect tax from their customers and pass it on to HMRC (Her Majesty’s Revenue and Customs).
While the basics of VAT might sound straightforward, the details of how and when you can reclaim VAT can get a bit complicated. Let’s go over the essentials.
How Does VAT Work for Freelancers?
When you’re VAT registered, you charge VAT on the services you provide and this is called “output tax.” You also pay VAT on business expenses (like office supplies or travel) and this is called “input tax.” The key idea is that the VAT you pay on your business expenses can be reclaimed. If the expenses made are solely for business purposes.
If you’re a freelancer who is VAT registered, the VAT you charge your clients is typically greater than the VAT you pay on your expenses. The difference is what gets paid to HMRC after you file your VAT return.
Can I Claim Back VAT as a Sole Trader?
Yes! As a sole trader, you can reclaim VAT on business expenses if you are VAT registered. Being a sole trader doesn’t prevent you from claiming VAT back. The only requirement is that you’re VAT registered and the expenses are business-related.
Do I Need to Register for VAT as a Freelancer?
As a freelancer in the UK, you must register for VAT if either of the following apply:
- Your total taxable turnover for the last 12 months goes over £90,000.
- You expect your taxable turnover to go over £90,000 in the next 30 days.
This threshold increased from £85,000 to £90,000 in April 2024 and remains at £90,000 for the 2025/26 tax year.
Who Can Reclaim VAT?
If you’re VAT registered, you’re eligible to claim back VAT on expenses related to your business. This includes freelancers working across various industries such as marketing, design, photography, consultancy, and more.
Which Businesses Aren’t Eligible for VAT Reclaim?
Some businesses and types of purchases aren’t eligible for VAT reclaim. For instance, if your business only provides VAT-exempt services (like healthcare or education), you can’t claim VAT back. Similarly, personal expenses and items used for personal purposes are not eligible.
A Step-by-Step Guide to Claiming VAT Back as a Freelancer
The process to reclaim VAT is fairly simple but it’s important to follow each step carefully. Here’s what you need to do:
Step 1: Receive a VAT Invoice and Verify It’s Compliant
Make sure you receive a VAT invoice from your suppliers. This invoice should clearly state the amount of VAT charged and include the supplier’s VAT registration number. Without this information, you won’t be able to reclaim VAT.
Step 2: Pay the Invoice (Including the Proper VAT)
Once you’ve received a valid VAT invoice, you can typically reclaim the VAT shown on it, even if you haven’t paid the supplier yet (under standard VAT accounting). However, you must eventually pay the invoice, and you need to keep all your VAT invoices and records safe for at least six years for HMRC compliance.
Step 3: Submit Your VAT Return to HMRC
Submit your VAT return to HMRC, usually on a quarterly basis. This involves declaring how much VAT you’ve collected from your clients and how much VAT you’ve paid on your expenses. Your VAT return will show whether you owe VAT or whether you can reclaim it.
Step 4: HMRC Refunds the VAT
If you’ve paid more VAT on your expenses than you’ve collected from clients, you’re entitled to a refund from HMRC. They will process your refund after receiving your VAT return.
How Do I Submit My VAT Return?
1. Use MTD-Compatible Software
From April 2022, all VAT-registered businesses must use Making Tax Digital (MTD)-compatible software to submit VAT returns. This means you can no longer use the traditional VAT online account for submissions. You need to choose software that allows you to keep digital records and submit VAT returns directly to HMRC.
2. Find Compatible Software
HMRC provides a tool to help you find MTD-compatible software that suits your business needs. You can search for options and compare features to select the best fit for your circumstances.
3. Submit Your VAT Return
Once you’ve chosen and set up your MTD-compatible software, you can use it to:
- Keep digital records of your VAT transactions.
- Prepare and submit your VAT returns directly to HMRC.
- Pay any VAT due electronically.
Ensure you submit your VAT return on time to avoid penalties. The deadline is usually one calendar month and 7 days after the end of your accounting period.
4. Exemptions from MTD
If it’s not practical for you to use digital tools due to reasons such as age, disability, location, or religious beliefs, you may apply for an exemption from MTD. To apply, contact HMRC with your VAT registration number, business details, and reasons for the exemption. Continue submitting your VAT returns as usual until you receive HMRC’s decision.
What Can I Claim VAT Back On?
As a VAT-registered freelancer, you can reclaim VAT on most items or services that are used for your business. Here are some examples:
- Office supplies: Things like pens, paper, printer ink, and office furniture.
- Software: If you pay for business-related software, like accounting tools or project management systems.
- Marketing: From the cost of advertising to printed flyers, you can claim VAT back on these expenses.
- Utility bills: If you work from home, a portion of your utility bills (like electricity, gas, and water) can be claimed.
Are There Any Exceptions to VAT Claims?
There are a few items that are not eligible for VAT reclaims, including:
- Personal expenses: Items not used for business purposes, such as clothes or personal groceries.
- Entertainment costs: VAT is generally not reclaimable on business entertainment expenses for clients, customers, or suppliers, including meals, drinks, and tickets to events. However, VAT on entertaining your own employees is usually reclaimable.
- VAT on VAT-exempt goods and services: If your business provides VAT-exempt services (e.g., healthcare or education), you cannot claim VAT back on associated expenses. If your business makes both taxable and exempt supplies (partially exempt), your ability to reclaim VAT will be restricted.
Can I Claim VAT on Items I Use Personally?
No, you can’t claim VAT on personal expenses. However, if you use something partly for business and partly for personal use (like your phone or car), you can reclaim VAT based on the percentage of business use. For example, if you use your phone 60% for work, you can claim back 60% of the VAT on your phone bill.
How Do I Claim VAT Back?
Every quarter (or annually, depending on your VAT scheme), you’ll need to submit a VAT return to HMRC. This is where you declare how much VAT you’ve charged to clients and how much VAT you’ve paid on your expenses.
You’ll need to calculate the difference between the VAT you’ve charged (output tax) and the VAT you’ve paid (input tax). If you’ve paid more VAT on your expenses than you’ve collected from your clients, you can claim the difference back.
Can I Claim VAT Back Immediately?
If you’re VAT registered, you can generally claim back VAT on your expenses as soon as they are included in your VAT return, even if you haven’t paid the supplier yet (under standard VAT accounting). However, you need to keep records of the expenses for at least six years for HMRC compliance
What Details Do I Need For A VAT Return?
To prepare your VAT return, you’ll need comprehensive digital records of all your VAT transactions. Under Making Tax Digital (MTD), these records must be kept digitally using MTD-compatible software. Key information required includes:
- Output VAT: The total VAT you’ve charged on your sales and other supplies (based on your sales invoices).
- Input VAT: The total VAT you’ve paid on your business purchases and expenses (based on valid purchase invoices).
- Total Sales: The net value of all goods and services you’ve supplied.
- Total Purchases: The net value of all goods and services you’ve received.
- Adjustments: Any necessary adjustments to your VAT calculation (e.g., corrections for previous periods, bad debt relief, partial exemption adjustments).
Common Challenges in VAT Reclaim for Freelancers
Freelancers face unique challenges when it comes to VAT, including:
- Tracking mixed-use items: Some items like your car or phone may be used for both personal and business purposes. In this case you need to calculate the percentage of business use and only claim VAT on that portion.
- Understanding the rules for digital services: If you are offering digital services or products, the VAT rules can be a bit more complex, especially with EU clients.
What Happens When You Work With an EU-Based Freelancer?
When working with freelancers based in the EU, VAT rules change. The VAT rules for cross border services depend on whether you are working with a business or an individual. For B2B (business-to-business) services, VAT is usually not charged but the reverse charge mechanism may apply.
If you work with a freelancer in the EU, it’s crucial to make sure both parties are clear about the VAT rules.
Be sure to consult HMRC guidelines or a tax professional to avoid confusion.
What If You Make A Mistake?
If you’ve made an error on your VAT return, you can amend it. You must do this within four years of the end of the VAT period. For smaller mistakes, you can correct them directly through your next VAT return.
How To Keep Good VAT Records?
HMRC requires that you keep detailed records of all your transactions and VAT-related paperwork. This includes sales invoices, purchase invoices, and VAT receipts. You need to keep these records for at least six years.
Using accounting software like QuickBooks or Xero can make this easier and help you manage your VAT records digitally.
UK VAT Reclaim Mistakes to Avoid
The VAT reclaim process isn’t without its pitfalls. Here are some common mistakes freelancers make:
- Not keeping proper records: Always keep a record of all invoices, receipts, and VAT-related paperwork.
- Claiming VAT on non-business expenses: Only claim VAT on items directly related to your business. Personal expenses don’t qualify.
- Missing the VAT return deadline: If you miss the VAT return deadline, you may incur penalties. Always stay on top of when your VAT returns are due.
The Bottom Line
Claiming VAT back as a freelancer is a smart way to keep more money in your pocket. Just make sure you’re VAT registered, keep track of your receipts and file your VAT returns on time.
Don’t overcomplicate it just stay organised, know the rules, and you’ll be good to go. If you’re not sure about something, ask a tax professional. They can save you time and hassle.
Disclaimer: This article provides general information on how freelancers can claim VAT back on expenses in the UK.
