VAT for interior designers in the UK: thresholds, fees, disbursements and invoices

This is not tax advice. It is a plain-English walk through HMRC’s published guidance, written for interior design studios. VAT turns on the facts of each arrangement and on what your contracts say. Before you change how you buy or invoice, speak to your accountant and, where the answer matters, check it against the HMRC pages linked below.

Most studios meet VAT in three places: nearing the registration threshold, buying furniture for a client, and an accountant asking whether that sofa was “a disbursement”.

Do interior designers have to register for VAT?

You must register when your taxable turnover goes over the threshold. The VAT registration threshold is £90,000, and there are two tests (GOV.UK: when to register):

• Looking back. Your taxable turnover for the last 12 months has gone over £90,000. This is a rolling 12 months, not your financial year, so check it every month. You then have 30 days from the end of the month in which you went over to register.
• Looking forward. You realise your taxable turnover is going to go over £90,000 in the next 30 days alone. You must register by the end of that 30-day period, and your registration takes effect from the date you realised.

The trap is that taxable turnover is not only your fees. If you buy furniture and sell it on to clients in your own name, those sales count too. A studio with modest fees and one large furnishing project can cross the threshold in a single month, and a confirmed order for a whole house of FF&E can bring the forward-looking test into play before any money arrives.

You can also register voluntarily below the threshold (GOV.UK: VAT registration). Whether that makes sense depends mostly on your clients. Businesses that can reclaim VAT will not mind it on your invoice. Private homeowners cannot reclaim it, so for them VAT adds 20% to the bill.

VAT on design fees

Once you are registered, your design fees are a supply of services, and most will be charged at the standard rate, currently 20% (GOV.UK: VAT rates). For most studios that covers concept work, drawings, specification, project management and procurement or handling fees. Clients outside the UK may be treated differently; ask your accountant.

Goods: are you buying as principal or as agent?

HMRC’s guidance on agents (VAT Notice 700, section 22) separates two roles:

• As principal, you buy the goods yourself and sell them on to your client. The supplier invoices you. You reclaim the VAT on the purchase as input tax and charge VAT on your full selling price. Your trade discount and any mark-up sit inside that selling price.
• As agent, you arrange a purchase that is really between your client and the supplier. Notice 700 says there are then usually two separate supplies: the goods from the supplier to your client, and your own services to your client, for which you charge a fee or commission. Normal VAT rules apply to that fee (paragraph 22.3).

Notice 700 also covers agents who act in their own name. If you issue an invoice in your own name for goods you arrange for your client, HMRC says that for VAT purposes you treat the transaction as both a supply to you and a supply by you (paragraph 22.6). So if the supplier invoices your studio and your studio invoices the client for the sofa, the VAT result is close to buying as principal: you account for VAT on the sale and can reclaim the VAT charged to you.

Your terms should say which model you use, and your paperwork should match. A contract that calls you the client’s agent does not help much if every supplier invoice is in the studio’s name and the client never knew who the maker was.

Disbursements: HMRC’s eight conditions

“Disbursement” has a narrow meaning for VAT. A payment you make for a client can be left out of your VAT calculation only if all of the following apply. This is HMRC’s list from its internal manual (VTAXPER39000), with the same conditions in Notice 700 paragraph 25.1.1:

1. You acted as your client’s agent when you paid the third party.
2. Your client, not you, received and used the goods or services.
3. Your client was responsible for paying the third party.
4. Your client authorised you to make the payment on their behalf.
5. Your client knew the goods or services would come from a third party.
6. Your outlay is itemised separately on your invoice to the client.
7. You recover exactly the amount you paid the third party, no more.
8. The goods or services are clearly additional to what you supply on your own account.

If any condition fails, it is not a disbursement. If the supplier charged VAT, you cannot reclaim it, because the supply was not made to you. Your client may not be able to reclaim it either if they do not hold a valid VAT invoice. HMRC’s view is that disbursement treatment is usually only an advantage where the supplier charged no VAT, or where the client cannot reclaim VAT anyway (GOV.UK: costs or disbursements passed to customers).

If you do treat items as disbursements, keep evidence. HMRC expects evidence such as order forms or copy invoices that show you were entitled to leave the payment out, and you must be able to show you did not reclaim the VAT on it (Notice 700 paragraph 25.1.2).

Recharges, and why a mark-up changes everything

A cost you pass on that does not meet the disbursement conditions is a recharge. HMRC says plainly that you must charge VAT on recharges, whether or not you paid VAT on the cost. Notice 700 adds that condition 2 usually rules out an agent’s own travelling expenses, phone bills and postage. So mileage to site and sample postage are normally recharges, with VAT, even at cost.

Condition 7 is the easy one to miss. Add any margin to a supplier’s price and you no longer recover the exact amount paid, so the item cannot be a disbursement. Either treat it as a sale of goods with VAT on the full amount you charge, or keep the supplier cost at exactly cost and charge a separate procurement fee, which carries VAT as one of your services.

HMRC’s worked example in Notice 700 shows how an invoice should look when both appear. The supplier charges an £80 fee, passes on £20 of expenses that do not qualify as disbursements, and pays £50 for the client that does qualify:

Source: VAT Notice 700, paragraph 25.1.2.

Trade discounts and mark-up

Whether you pass on your trade discount, keep it and disclose it, or charge a procurement fee is a commercial and ethical decision, covered in trade discounts and mark-up. The VAT consequence follows from the role you take:

• You keep the discount and resell as principal. You charge VAT on what the client pays you, and the discount is part of your margin.
• You pass the exact net cost through as a disbursement. The discount goes to the client, and all eight conditions must still be met, including the client being responsible for paying the supplier.
• You pass the discount on and charge a procurement fee. The fee is a standard-rated service; the goods follow principal or agent treatment as above.

On the supplier’s side, Notice 700 paragraph 7.3.2 says that where a discount is unconditional and the customer pays the discounted amount, VAT is based on the discounted amount. A straightforward trade price is therefore the VAT value of their supply to you.

Whichever position you take, keep the supplier’s cost, your price and the VAT visible line by line. In Techstyles, VAT sits on each line, alongside the rest of the project’s finance, so you can check it before an invoice goes out.

Goods from overseas

Furniture imported from outside the UK brings import VAT and possibly duty. VAT-registered businesses can use postponed VAT accounting and declare and recover import VAT on the same VAT Return, with no approval needed. Your VAT registration number goes on the import declaration, and the monthly postponed import VAT statements are in the Customs Declaration Service (GOV.UK: postponed VAT accounting). Commodity codes, Incoterms and currency are covered in buying furniture from overseas suppliers.

What a VAT invoice must show

Notice 700 paragraph 16.3.1 lists what a VAT invoice must include:

• a sequential number that uniquely identifies the invoice
• the time of supply (tax point)
• the date of issue, if different from the time of supply
• your name, address and VAT registration number (a trading name is fine if the registered name and address also appear)
• your client’s name and address
• a description sufficient to identify the goods or services
• for each description, the quantity or extent, the VAT rate and the amount excluding VAT
• the total excluding VAT
• the rate of any cash discount offered
• the total VAT, which must be in sterling
• the unit price, where the goods or services can be counted

For international studios: line amounts and the total excluding VAT can be in any currency, but the VAT total must be in sterling. You must normally issue the VAT invoice within 30 days of the tax point (paragraph 16.2.3). A simplified invoice is allowed where the supply is £250 or less including VAT (VAT Notice 700/21, paragraph 4.5), which rarely applies to FF&E.

If you invoice in euros or dollars, record the exchange rate used on each invoice so the sterling VAT figure can be traced. Techstyles converts each invoice at the day’s rate, freezes that rate on the invoice and sends it to Xero in its own currency. The Xero side is covered in Xero for interior designers.

A short checklist for your accountant meeting

1. Is our rolling 12-month taxable turnover tracked monthly, including goods we resell?
2. Do our terms say whether we buy as principal or as agent, and do supplier invoices match that?
3. Which items, if any, do we treat as disbursements, and do they meet all eight conditions?
4. Are mileage, postage and other costs we pass on being charged with VAT as recharges?
5. Do our invoices carry every field in Notice 700 paragraph 16.3.1, with VAT in sterling?
6. How do we treat clients based outside the UK?

For how fees and mark-up fit together commercially, read how to charge for interior design services. If you want VAT on every line and invoices that go to Xero without re-keying, Techstyles has a 30-day free trial with no card required.