Contractors’ Questions: Must I always apply VAT if I’m VAT-registered?

Contractor’s Question: Even though I am a VAT-registered limited company, can I choose not to apply VAT where the addition of VAT to my invoice results in the total sum payable to me exceeding a limit that I agreed with the client?

If I put through the invoice as it currently reads, with the VAT added, I fear it will cause a problem. At the least it will irritate the client, given that my company agreed with the client that the maximum price they’d pay for my services wouldn’t exceed the sum of ‘x’, and with VAT added, it does exceed sum ‘x.’ What can I do to get paid, not annoy the client and not to break any VAT rules?

Expert’s Answer: The answer is very straightforward - if a business is registered for VAT then it must charge VAT on all its taxable sales. There's no option to decide not to charge VAT to certain customers.  Read what HM Revenue & Customs has to say about it.

The only situation where a VAT-registered business wouldn't have to charge VAT is if it was making exempt sales, such as insurance, postage, and health services.

Unfortunately you appear to be out of luck - you would have to take sum ‘x’ as the figure inclusive of VAT.  If the VAT rate on the sales you make is 20%, then the figure excluding VAT is ‘x’ times 5/6 - and that's what you’d get to keep (- it's ‘x’ times 5/6 because we're starting with the VAT inclusive figure).

More positively though, if the client is him/herself registered for VAT, then being charged VAT is actually no disadvantage because he/she would be able to reclaim the VAT. However if the customer is a member of the public or a non-VAT-registered business, then VAT does indeed represent an extra cost.

The expert was Emily Coltman ACA, chief accountant at Free Agent, an accounting software provider to contractors and the self-employed.

Editor’s Note: Further Reading –

Contractors can’t escape the online-only VAT man

Contractors’ Questions: What if my invoice is missing VAT?

Contractors’ Questions: When do I need to deregister for VAT?