In most cases, agencies provide services to other businesses. Whether they’re graphic design services, SEO, copywriting, podcast editing, marketing or recruitment - they’re all services. Being services, the rules on VAT differ slightly from the usual, and it’s important you get these right as your agency grows.

Registration Threshold

The current VAT registration threshold for 2023 is £85,000. This is fixed until 31 March 2024. This applies to all businesses.

Compulsory Registration

If your “taxable turnover” for any 12-month period exceeds the threshold, you must register for VAT from the day following the month after you exceed the threshold. For example, if your “taxable turnover” is £90,000 between 1 October 2022 and 30 September 2023, you’ve exceeded the £85,000 threshold in a 12-month period, and you’ll need to register for VAT from 1 November 2023 (skip one month, start from the 1st of the next month). You need to review this monthly to make sure you don’t miss your compulsory registration date.

Voluntary Registration

If you haven’t reached the £85,000 threshold for “taxable turnover” in any 12-month period, you may still be able to voluntarily register for VAT.

There are two main reasons agencies do this:

  1. Most of your customers are over the VAT threshold and charging them VAT won’t negatively affect your sales (customers won’t leave for someone who isn’t VAT registered because they can recover any VAT you charge anyway). The benefit of being VAT registered here is that you can claim VAT on your expenses which you cannot do if you’re not VAT registered.
  2. If your VAT on your expenses is generally higher than the VAT on your sales you’ll be in a repayment position with HMRC. This means by registering voluntarily you’ll receive money from HMRC rather than paying it. Just make sure you’ve done your calculations correctly, and you don’t cause yourself a big headache.

Always consider the customer - Place of Supply

When calculating your VAT thresholds, or whether or not you add VAT onto a sale of services invoice, you need to consider the customer.

The rules specific to this as linked here, and I’ll refer to specific sections of this guidance where relevant. To keep this simple, we’ll assume you’re trading in Business to Business (B2B) services.

VAT rules for Services rely on knowing the “Place of Supply” - here is the HMRC guidance. In almost all cases the Place of Supply for B2B supplies will fall where the customer belongs (see section 6), but you do need to gather information from your customer to evidence the fact that they are in business and belong outside of the UK. Examples of this evidence are shown in section 6.3.

If the supply is in the UK it is subject to UK VAT. If the supply is in an EU member state or another country it is said to be ‘outside the scope’ of UK VAT.

For example, if you’re a UK company providing advertising and marketing services to a UK company, you’ll need to charge UK VAT.

If you’re a UK company providing these services to a US company, you won’t charge UK VAT.

Tip: On Xero, copy the Zero Rated VAT code and call it "Outside the Scope Sales". Set it up as a default VAT code on a new Branding Theme specific for your outside the UK clients. Reduce the risk of getting it wrong!

What is “Taxable Turnover”?

Taxable turnover, for the purposes of VAT, is the sales that attract UK VAT mentioned above.

Sales which are “Outside the scope” and don’t require the charge of UK VAT are not deemed to be included in Taxable Turnover.

For example, if you have £50,000 of UK sales (where VAT would apply), and £40,000 of US/EU sales (where VAT would not apply), you won’t be required to register for VAT as your “Taxable Turnover” is £50,000.

Tip: Remember that you can always voluntarily register in this scenario - it might just be worth it!

What goes on my VAT return?

If you do need to register for VAT or do so voluntarily, you will need to include information about your “Outside the scope” sales on your VAT return, however, it doesn’t affect your VAT payable.

Your VAT on your Sales (which is the VAT charged on the UK sales) goes in Box 1, however, your total sales (including Outside the Scope sales) goes in Box 6.

What goes on my personal tax return?

Personal tax is separate from VAT, however if you're a sole trader, you’ll need to make sure that your sales and expenses are treated as “Net” on your personal tax return where you’ve paid or reclaimed VAT on transactions in the period.

If you’re not VAT registered yet because your “Taxable Turnover” is below £85,000 but your total sales exceed £85,000, there's no need to panic if you’ve done your maths right. Keep a record of your threshold checks (calculations) and provide these to HMRC if they ever ask for them. You’ll want to clearly identify the total “taxable turnover” and the total sales that would fall “outside the scope” here.

If you run a Limited company, your personal tax return will look very different (salary and dividends), so you can just ignore that bit! 

Remember, this is only a summary of a very specific subsection of UK VAT law. Always review the legislation with your own situation in mind and engage a qualified professional to assist in your particular case. The above should not be seen as advice for you specifically.

If you’d like to work with us to understand your specific scenario, you can book a Discovery Call here.