What Is VAT and Do You Need to Charge It?

VAT — Value Added Tax — is one of the most misunderstood topics for new freelancers and small business owners. Many people either worry they need to register immediately, or they avoid the topic entirely and get caught out later. This guide explains VAT in plain English so you know exactly where you stand.

What Is VAT?

VAT is a consumption tax applied to most goods and services sold in countries that operate a VAT system — which includes the UK, all EU member states, Australia (called GST), Canada (GST/HST), and many others. The US does not have a federal VAT but has sales tax at state level.

The standard VAT rate in the UK is 20%. In the EU it varies by country — Germany charges 19%, France 20%, and so on.

When your business is VAT registered, you add VAT on top of your prices, collect it from customers, and pass it on to the tax authority (HMRC in the UK). You can also reclaim VAT on your own business purchases.

Do You Need to Register for VAT?

In the UK, you must register for VAT if your VAT-taxable turnover exceeds £90,000 in a 12-month period (as of 2024). Below this threshold, VAT registration is voluntary.

In the EU, thresholds vary by country — they range from €10,000 to €85,000 depending on the member state.

Should You Register Voluntarily?

Some freelancers register voluntarily even below the threshold. This can make sense if:

• Most of your clients are VAT-registered businesses (they can reclaim the VAT anyway, so it doesn't put them off)
• You have significant business expenses with VAT on them that you'd like to reclaim
• You want to appear more established to clients

However, voluntary registration isn't right for everyone — it adds quarterly reporting obligations (VAT returns) and can price you out if your clients are members of the public who cannot reclaim VAT.

How to Show VAT on an Invoice

If you are VAT registered, your invoice must show:

• Your VAT registration number
• The VAT rate applied to each line item
• The net amount (before VAT)
• The VAT amount (as a separate line)
• The gross total (including VAT)

FreeInvoiceMaker lets you add a tax percentage to each line item, which automatically calculates the amounts — just enter your VAT rate (e.g. 20) in the Tax % column.

What If You're Not VAT Registered?

Simply don't add any VAT to your invoices. You don't need to mention VAT at all if you're not registered. Your invoice total is just your net price — that's the full amount your client pays.