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.

A Worked Example

Say a UK-based freelance consultant is VAT registered and bills a client £2,000 for a project, with the standard 20% VAT rate applying. The invoice would show: net amount £2,000, VAT (20%) £400, gross total £2,400. The consultant collects the full £2,400 from the client, then remits the £400 VAT portion to HMRC (typically via a quarterly VAT return), keeping the £2,000 net as their actual revenue. If that same consultant purchased a £600 laptop with 20% VAT included, they could reclaim the £100 VAT portion of that purchase against what they owe, reducing their net VAT payment for that quarter.

What Happens If You Cross the Threshold Mid-Year?

If your rolling 12-month turnover crosses the VAT registration threshold partway through the year, you're generally required to register within 30 days of crossing it, with your effective registration date typically being the first day of the following month. Missing this deadline can result in backdated VAT liability and penalties, so it's worth tracking your rolling turnover regularly rather than only checking once a year at tax time.