Most consultants know they need to register for VAT once their turnover hits a certain threshold. Far fewer know that registering early could actually work in their favour.
VAT is one of those topics that gets put off until it feels urgent. But understanding it properly, before you have to, puts you in a significantly stronger position.
At APH, we have been advising consultants on VAT since 2010. Here are the seven things that come up most often.
1. The VAT registration threshold
You must register for VAT once your taxable turnover exceeds £90,000 in any rolling 12-month period, or if you expect to exceed it in the next 30 days alone.
This is not based on your annual accounts figures. It is based on a rolling 12-month total, which means you need to be monitoring your turnover regularly rather than waiting until your year-end.
If you breach the threshold and fail to register on time, HMRC can back-charge VAT on all sales made since the date you should have registered, and may also apply penalties and interest for late registration.
You must register within 30 days of the end of the month in which you went over the threshold. Once registered, you must charge VAT on your services, submit VAT returns, and pay any VAT owed to HMRC.
2. You can register voluntarily before you hit the threshold
This is the point most consultants miss entirely.
You can register for VAT voluntarily at any point, even if your turnover is well below £90,000. And for many consultants, doing so makes good financial sense.
For consultants whose clients are VAT-registered businesses that can reclaim the VAT you charge, voluntary registration can make good sense. Whether it is right for you depends on your client mix and how you price your services.
Practical advantages of voluntary registration include reclaiming VAT on your own business purchases and expenses, and presenting as a more established business to larger corporate clients who expect to see a VAT number on your invoices.
If your clients are predominantly individuals or small businesses who cannot reclaim VAT, the calculation is different and voluntary registration may not be the right move.
3. Not all consultancy services are treated the same for VAT
Most consultancy services are standard-rated for VAT purposes, meaning you charge VAT at 20% on top of your fees.
However, the picture can become more complex depending on the nature of your work and who your clients are.
If you work with clients outside the UK, different VAT rules may apply. Services supplied to VAT-registered businesses in other countries are generally subject to the reverse charge mechanism, meaning you do not charge UK VAT on those invoices. However, the rules vary depending on the country and the nature of the service.
If any of your work crosses international borders, even occasionally, it is worth taking specific advice on how VAT applies to those transactions rather than assuming the standard rules apply.
4. The Flat Rate Scheme could simplify your VAT
The Flat Rate Scheme is an HMRC scheme designed to simplify VAT for smaller businesses. To join, your VAT taxable turnover must be £150,000 or less, excluding VAT. This is a separate limit from the registration threshold.
Instead of calculating the exact difference between the VAT you charge and the VAT you reclaim on purchases, you pay a fixed percentage of your gross turnover to HMRC. For consultants, the flat rate percentage varies by sector, so it is worth confirming the correct rate for your type of work.
If you charge VAT at 20% but pay HMRC at a lower flat rate, you keep the difference. Whether this is advantageous depends on your specific flat rate percentage and how much VAT you incur on your own purchases.
The Flat Rate Scheme is not always the right choice. If you have significant VAT on purchases, the standard VAT scheme may actually leave you better off overall.
It is worth running the numbers with your accountant before deciding which scheme to use. Find out more about our specialist accounting services for consultants here.
5. You cannot reclaim VAT on everything
Once VAT registered, you can reclaim the VAT on business purchases and expenses. But there are rules, and not everything qualifies.
You can generally reclaim VAT on:
- Equipment and technology used for your consultancy
- Software subscriptions
- Professional services
- Travel and accommodation for business purposes
You cannot reclaim VAT on:
- Business entertainment
- Purchases with a personal element
- Items purchased before your VAT registration date in most cases
Keeping clear records of your purchases and their business purpose makes the reclaim process straightforward and protects you in the event of an HMRC enquiry.
6. Missing a VAT return deadline has consequences
Most consultants submit VAT returns quarterly, though filing frequency can vary depending on your business and the scheme you use. For quarterly filers, the return and payment are due one month and seven days after the end of each VAT period.
Missing a deadline results in penalties, and repeated late submissions can trigger HMRC scrutiny of your wider tax affairs.
Most accounting software can automate much of the VAT return process, which significantly reduces the risk of errors or missed deadlines. At APH, we help all our VAT-registered clients stay on top of their returns without it becoming a burden.
Making Tax Digital for VAT is already in force, meaning VAT-registered businesses must keep digital records and submit returns through compatible software.
If you are not already using MTD compatible software, this is something worth addressing sooner rather than later.
7. Getting VAT right from the start saves problems later
VAT mistakes are costly. Charging VAT when you should not, failing to charge it when you should, missing registration deadlines, or claiming back VAT you are not entitled to can all result in penalties and interest from HMRC.
The good news is that getting it right is not complicated with the right support in place.
“At APH, we have been working with consultants across the UK for over 15 years. VAT is one of the areas where we see the most easily avoidable mistakes, and one of the areas where good advice pays for itself most quickly.” — Paul White, MD, APH Accountants
Whether you are approaching the registration threshold for the first time, considering voluntary registration, or simply want to make sure your VAT position is handled correctly, we are here to help.
Book a free consultation call today.
Frequently asked questions
Do all consultants need to charge VAT? No. You only need to charge VAT once you are registered. Registration is compulsory once your turnover exceeds £90,000 in any rolling 12-month period, or if you expect to exceed it within the next 30 days. Below that threshold, registration is voluntary.
Can I reclaim VAT on expenses before I registered? In some cases yes. You can reclaim VAT on goods purchased up to four years before registration and services purchased up to six months before registration, provided they were for business purposes and you still hold the relevant invoices. HMRC sets specific conditions for these claims, so it is worth confirming your position with your accountant.
What happens if I go over the VAT threshold without realising? You must register within 30 days of the end of the month in which you breached the threshold. If you fail to do so, HMRC can back-charge VAT on all sales made since the date you should have registered, and may also apply penalties and interest for late registration.
Is VAT the same for limited company consultants and sole traders? Yes. VAT registration rules and obligations are the same regardless of your business structure. The threshold, return process, and scheme options all apply equally to sole traders and limited company consultants.