In the UK, sole traders may need to register for Value Added Tax (VAT) when their annual turnover exceeds a certain threshold. In this guide, we'll cover when a sole trader needs to pay VAT, the types of VAT, the full registration process and more. Let's get started.
Does a sole trader pay VAT?
Yes, a sole trader must pay VAT if their taxable turnover exceeds £90,000 (previously £85,000) within any 12-month period. Taxable turnover includes income from goods or services subject to VAT at standard, reduced, or zero rates. Even if a sole trader’s turnover is below this threshold, they can choose to register voluntarily to benefit from reclaiming VAT on business expenses.
When should a sole trader register for VAT?
A sole trader is legally required to register for VAT if their taxable turnover exceeds £90,000 in a 12-month period. It’s essential to monitor revenue to avoid missing the registration deadline. If turnover approaches the threshold, registration must be completed within 30 days of exceeding the limit.
Key situations when a sole trader might register for VAT:
Compulsory registration: Turnover has exceeded £90,000.
Voluntary registration: To enhance business credibility, reclaim VAT on purchases, or work with VAT-registered clients who prefer dealing with VAT-registered suppliers.
VAT registration process explained
Registering for VAT as a sole trader in the UK involves following a structured process to ensure compliance with HMRC regulations. Here’s a step-by-step breakdown of the process:
1. Check if you need to register
Determine if your taxable turnover exceeds the VAT threshold in a 12-month period. This includes all sales that are subject to VAT at the standard, reduced, or zero rates. If your turnover is below this threshold, you can consider whether voluntary registration is beneficial for your business.
2. Gather the required information
Before starting your application, ensure you have:
Your Unique Taxpayer Reference (UTR)
National Insurance number (for sole traders)
Details about your business activities and estimated turnover
Your business bank account information
3. Apply online through HMRC’s website
Most applications are completed online. You’ll need to create a VAT online account (sometimes called a Government Gateway account) if you don’t already have one. During registration, choose whether to use the standard VAT accounting scheme or an alternative like the Flat Rate Scheme or Cash Accounting Scheme, depending on what suits your business.
4. Receive your VAT registration certificate
This document will include your VAT number, the date you were registered, and the date from which you must start charging VAT. You’ll typically receive your certificate within 30 working days, though it can take longer in some cases.
5. Display your VAT number and charge VAT on invoices
Once registered, include your VAT number on all invoices and charge VAT at the correct rate on your sales. For example, if you charge £100 for a service, you will add 20% VAT (£20) if using the standard rate, making the total £120.
6. File VAT returns and pay VAT due
Submit a VAT return every quarter using Making Tax Digital (MTD)-compliant software. This return reports the VAT you’ve collected on sales and the VAT you’ve paid on purchases. The balance is either payable to HMRC or refundable to you.
What happens after registration?
Once VAT registered, a sole trader must:
Charge VAT on sales: Add the applicable VAT rate to invoices.
File VAT returns: Typically every quarter, reporting VAT collected and paid.
Maintain accurate records: Keep all receipts and invoices for six years.
Failure to comply with VAT obligations can result in penalties from HMRC, so timely returns and payments are essential.
Main VAT rates for sole traders explained
VAT rates in the UK depend on the type of goods or services offered. The main types include:
VAT standard rate | The standard rate is 20%, applicable to most goods and services. |
VAT reduced rate | A 5% reduced rate applies to specific products, including domestic energy and children’s car seats. |
VAT zero-rate | Certain items, such as books and children’s clothes, are taxed at 0%, meaning no VAT is charged but the business can reclaim input VAT on related expenses. |
Standard rate (20%)
The standard VAT rate of 20% applies to most goods and services in the UK, including professional services, electronics, and most retail goods. This rate is the default for many businesses and forms the majority of VAT returns.
Example: If you sell a service for £500, you would charge an additional £100 (20% of £500) as VAT, making the total bill £600.
Reduced rate (5%)
Certain goods and services are subject to a reduced rate of 5%. Examples include:
Domestic energy and fuel
Children’s car seats
Some residential property renovations
Example: A £1,000 domestic heating installation would attract £50 VAT (5% of £1,000), resulting in a total charge of £1,050.
Zero rate (0%)
Goods like children’s clothing, books, and most food items fall under the zero rate. No VAT is charged to the customer, but you can still reclaim VAT on expenses related to providing these goods.
Example: Selling a children’s book for £10 involves charging no VAT to the customer, but you can claim input VAT on costs incurred in producing or selling the book.
Key benefits of sole traders being VAT registered
VAT registration comes with several potential advantages, even for sole traders who register voluntarily:
1. Ability to reclaim VAT on expenses
One of the most significant financial benefits is the ability to reclaim VAT paid on business expenses. This is especially valuable for businesses that purchase large quantities of supplies or equipment. For example, if you buy office equipment for £1,200 (including £200 VAT), you can deduct the £200 from the VAT you owe to HMRC.
2. Enhanced business credibility
Being VAT-registered can enhance your business's reputation, especially when dealing with larger clients or other VAT-registered businesses. Many suppliers and customers view VAT registration as a sign of professionalism and stability, making your business more appealing as a partner or service provider.
3. Voluntary registration advantages
Even if your turnover is below the mandatory threshold, voluntary VAT registration allows you to reclaim VAT on start-up costs and expenses. This is beneficial for businesses investing heavily in equipment or materials where input VAT exceeds output VAT.
4. Flat Rate Scheme simplicity
For businesses with straightforward operations, using the Flat Rate Scheme can simplify VAT accounting. Instead of calculating VAT on individual transactions, you pay a percentage of your total turnover, which may reduce administrative overheads.
FAQs
Is the first £85,000 VAT free?
No, the £90,000 (previously £85,000) is a threshold for when VAT registration becomes mandatory. Once this limit is exceeded, VAT registration is required, and VAT must be paid on applicable sales going forward.
Can a sole trader get VAT back?
Yes, VAT-registered sole traders can reclaim VAT on business expenses, provided they have valid VAT invoices for their purchases.
Can I check if a sole trader is VAT-registered?
Yes, you can find a VAT registration number using HMRC’s VAT number checker or the EU VAT Information Exchange System (VIES) for international checks.
What is the downside of being VAT-registered?
Key challenges include:
Increased paperwork: Quarterly VAT returns and detailed record-keeping are mandatory.
Higher prices: Charging VAT can make your services more expensive for non-VAT-registered clients.
Does a sole trader need a memorandum of association to register?
No, a memorandum of association is not required for sole traders. It is a formal document used when incorporating a limited company, not for sole traders registering for VAT.
Final thoughts
For many sole traders, VAT registration is a significant step that introduces new responsibilities and potential financial benefits. Understanding the process, knowing when to register, and staying compliant with HMRC rules can help maximise advantages while avoiding common pitfalls.
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References
Who should register for VAT from Gov.UK
Disclaimer: This article only provides general information and does not constitute professional advice. For any specific questions, consult a qualified accountant. Bear in mind that tax rules can change and will differ based on your circumstances.