As part of the process of formally registering as being self-employed, you may also want to consider registering for Value Added Tax (VAT) and here’s why:
Value Added Tax is a tax levied on goods, or services by the government. VAT rates do vary depending upon the goods or services to which it is to be applied.
This ranges from 0%, which is applied to some ‘essential’ items, some charitable services and some public services (e.g. admission fees to museums are currently VAT free) all the way up to 20%, which is the ‘standard rate’ of VAT. It is applied to all goods and services, which are deemed to be ‘non-essential’.
Also, we need to be aware that VAT rates do vary from time-to-time. In fact, as part of the governments ‘austerity measures’, in 2011, the Standard Rate increased from 17.5% up to 20%, which is where it has remained ever since. There also doesn’t seem to be any appetite to reduce it again anytime soon!
For our purposes, as freelance couriers, we only really need to concern ourselves with the Standard Rate as it is this rate that we will charge to our customers. It is the rate that will apply to all our major expenses, such as vehicle purchases, insurance and fuel. Finally, it is also the rate that HMRC will be expecting from us.
In fact, we only need to concern ourselves with VAT at all, if we are VAT Registered. If you are self-employed, being VAT registered is not compulsory, until your sales turnover reaches the threshold of £85,000 (as of 01/04/2018, which will then be held at this level for a minimum of two years).
Even if your current turnover is below the threshold, as a freelance courier, there are some advantages to voluntarily registering for VAT.
Being VAT registered will allow you to charge VAT on your ‘sales’. As a freelance courier, this means that if you do a job for a courier company and they agree to pay you £200 for that job, you can charge them VAT on this amount, thus adding 20% to your ‘sale’ meaning that you will receive £240 for the job instead of £200. Unfortunately, you don’t get to keep the additional £40. This belongs to the Government and therefore, you will have to pay this portion of your sale forward to them.
Being VAT registered also means that you can claim back VAT on your expenses, so for example, if you were to buy a van for £20,000, the dealer would charge you VAT on this purchase, meaning that you would actually have to pay £24,000.
(Please note: On a purchase like this you will still be charged VAT whether you are VAT registered, or not). However, if you are VAT registered, you can claim the VAT portion of this purchase back at the end of the quarter. (Bring on the new van)!
When you start adding in the amount of VAT you will be paying on fuel as part of you business, this benefit will really start to become worthwhile.
Besides the standard rate of VAT, in 2002, the government introduced the ‘Flat Rate Scheme‘, which is deliberately aimed at sole traders and small businesses as a means of simplifying their administrative burden.
To register for the flat rate scheme, your business must be turning over less than £150,000 in sales per annum (exclusive of VAT). Once registered, your business can then earn up to £230,000 per annum before you have to compulsorily de-register.
As a freelance courier being registered for the flat rate scheme means that you can no longer claim back VAT on your expenses. Where’s the benefit in that? You say….
Here’s the benefit:
- VAT is a tax (Value Added Tax – the clue is in the name), which means that ultimately the revenue raised from charging VAT will ultimate end up in the Treasuries coffers.
- On the Standard Rate Scheme, you will owe the Treasury 20% of your sales revenue. However, on the Flat Rate Scheme, this drops to 10%. So, while you will still be charging your customers 20%, you only have to pay half of this amount forward to the government.
- Your administrational liability drops because you no longer have to keep a record of all the VAT on your expenses and therefore no longer need to understand which items are charged at which rate.
As mentioned above VAT rates do vary from time-to-time, item-to-item and industry-to-industry. As a freelance courier, your flat rate liability is currently 10%, but it would be a different percentage if you were an accountant, or if you worked in some other industry.
HMRC are keen to promote the Flat Rate Scheme as it also reduces the administrative burden for them too. For this reason, they offer an additional 1% discount in your first year of being registered. Therefore, as a newly Flat Rate VAT registered freelance courier, your liability will only be 9% for the first 12 months.
At this point, it is worth noting the benefits that a good accountant can bring. As a freelance courier, you will benefit from being on the Flat Rate Scheme most of the time.
If you do happen to have a particularly large expense in a given period, your accountant will be able to switch you back onto the Standard Rate Scheme for that period only, so that you can reclaim the VAT on that van purchase you have just made!