Becoming a sole trader is one of the easiest ways to set up a new business. You will have complete control of your operations, allowing you to make decisions about how you run your business quickly and easily.
One of those decisions will concern Value Added Tax (VAT). You will need to decide whether your self-employed business merits VAT registration or not. It is a decision that will affect your customers as well as your business, so it is a big choice to make.
What does VAT registered mean?
VAT is a consumption tax added to the value of goods and services in the UK.
How much VAT does a sole trader pay?
At the time of writing, the standard VAT rate on most goods and services is 20%.
Some items, such as children’s car seats and home energy fall under the reduced rate category, which are charged at 5%. There are some goods and services like food and children’s clothing that are zero-rated and don’t incur a penny in VAT.
As a VAT-registered sole trader, you will be legally responsible for calculating and charging VAT to your customers. This VAT must be reported and transferred to HM Revenue and Customs (HMRC) using VAT returns.
The benefits of registering for VAT
By becoming voluntarily registered for VAT as a sole trader – even if you earn below the VAT threshold – there are multiple benefits you can enjoy as a business owner:
Guard against financial penalties for creeping over the VAT registration threshold
It’s not uncommon for some sole traders to creep over the VAT registration threshold and fail to become VAT registered. The last thing you want is a notice from HMRC and a financial penalty for failure to comply with compulsory VAT registration. By taking VAT registration voluntarily, you can sidestep the fear of overlooking the turnover threshold and focus on doing what you do best.
Enhance your brand’s reputation as a serious outfit
If you are a growing business that’s working hard to compete with other well-established firms in your marketplace, being VAT registered can help cement your brand as a larger going concern. You will receive a VAT registration number which you can display on your website, marketing brochures and stationery in a bid to enhance your image.
Claim back VAT on goods or services bought for your business
From the moment your business is VAT-registered, you can reclaim the VAT on all goods and services purchased for your business. It has been known for sole traders selling zero-rated products and buying standard rated products to help run their business to receive VAT refunds after submitting their VAT returns.
Reclaim VAT on goods bought up to four years from your date of registration
Better still, it may be possible to reclaim VAT paid on goods for your business as far back as four years, providing you are still using them today. Your business would need to have been trading throughout this period, with VAT invoices and records maintained as proof too. For services you only have up to six months before to claim.
Can I claim VAT back if I am not VAT registered?
If you are wondering how claiming VAT back works, you do need to be a VAT-registered sole trader to do so. If you don’t charge VAT to your customers, you cannot claim back any VAT on goods or services purchased for business use either. Even if you are a VAT registered sole trader, you will need to ensure you maintain records and valid VAT invoices to make an acceptable claim for VAT refunds.
How does VAT work for sole traders?
Do I need to charge VAT if I am self-employed?
If you are sat wondering if you should be charging VAT to customers as a self-employed professional, you only need to worry about this once you breach the VAT registration threshold. This is a benchmark annual turnover. Once you earn beyond this figure it is compulsory for any sole trader to register for VAT with HMRC.
What is the VAT threshold for a sole trader?
Once your annual turnover from the previous 12 months amounts to more than £85,000, you are obliged to register for VAT as a sole trader or if you know your turnover will go above £85,000 in the next 30 days. Once you have registered for VAT, you will receive a VAT registration certificate, detailing your business’ unique VAT number and the due date for your first quarterly VAT return.
Most VAT-registered sole traders earning above the £85,000 per annum threshold will also have to abide by the new Making Tax Digital (MTD) for VAT system. This will require you to maintain digital records of your VAT using software that’s compatible with HMRC systems.
Remember – we can help you to source MTD-compliant software and work with you to ensure you are managing your VAT data correctly during this period of change. MTD is also due to affect sole traders beneath the £85,000 VAT threshold from 2021, so now is a good time to familiarise yourself with digital bookkeeping systems that can track your revenue and expenses with ease.
How to become VAT registered
If you have decided that becoming VAT registered is the right thing for you and your business, you will need to register with HMRC.
The majority of sole traders will be able to register for VAT online. By registering for VAT, you will have a new VAT online account – also known as a Government Gateway account. This account will be your vehicle for submitting quarterly VAT returns to HMRC.
There are three types of businesses that must register for VAT by post instead:
- EU-based businesses ‘distance selling’ to the UK (registering with a VAT1A form)
- Businesses importing goods valued over £85,000 from an EU country (registering with a VAT1B form)
- Businesses disposing of assets on which 8th or 13th Directive refunds have been claimed (registering with a VAT1C form)
Once approved, your formal VAT registration certificate should be submitted to your VAT online account within 30 working days.
If you require professional assistance with registering your business for VAT and meeting your ongoing VAT obligations, we can work with you to manage your VAT affairs. By preparing and submitting VAT returns and liaising with HMRC as your Agent for VAT purposes, we can provide sole traders like you with peace of mind, allowing you to focus on doing what you do best – running your business.
Date published 26 Jun 2020 | Last updated 09 Jun 2021This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.