Now that VAT has made the jump from 17.5% to 20%, freelancers, contractors and SMEs will have to adjust their paperwork and price points accordingly. At Crunch, the process is incredibly simple – the online system has automatically switched the VAT rate so that when you create invoices, the value is already added at 20%. In other words, our customers don’t have to do a thing.

For everyone else, the VAT rate change can present a few potential pitfalls. This is a quick guide on how to manage the process and avoid any mishaps.

VAT returns and invoicing

The first thing you must ensure is that you add VAT at 20% on invoices sent on January 4 or thereafter. So, if you’re using templates which don’t automatically update themselves then you need to ensure that they are up-to-date. To reiterate: this is not an issue for Crunch customers.

When filing VAT returns you have to account for the different rates. As a quick explanation: with the VAT return (which you can do quarterly or annually) you have to add up the amount of VAT you’ve added onto your invoices. After this, you add up the amount of VAT you’ve been charged for services or products necessary for your business, for example: ink cartridges, paper and general office stationary. You then deduct this from the VAT you’ve charged. The amount leftover, is the amount you have to pay. Conversely, you may be in line for a tax repayment (if you’ve spent more on VAT than you’ve charged).

If you don’t account for the rate change correctly, the VAT return will be inaccurate leaving you in danger of a penalty from HMRC (find out more about penalties here).

Grey areas: spanning the VAT rate change

There are a number of grey areas for those scenarios which span the rate change.

* If you’re invoicing for work prior to the January 4 rate change, but receiving the money  and/or doing the work afterwards then you should keep it at the old flat rate of 17.5%.

* If you’re doing work before January 4 but invoicing afterwards, then you can choose whether to stick to 17.5% or add VAT at the new rate.

Update your price list

If you don’t update your price lists or add the VAT onto what you charge you are effectively shouldering the costs yourself. If you have an online price list, make sure it is updated.

If you need to refund a client, ensure you refund them at the rate they originally paid for your services.

Keep in mind, that if you’re earning less than £70,000 per year, you don’t have to be VAT registered. At Crunch, our accountants will always advise you on the best option for your business, and as much of the VAT process is automated it’s all remarkably painless.

Read more about how Crunch makes tax returns easy.