You will need to charge VAT as a sole trader if your annual turnover is more than £85,000. This is because the requirement for your business to register and then charge VAT is determined by the turnover (or revenue) of your company, not by its corporate structure. VAT (Value Added Tax) is an additional tax that is applied to some goods and services – at the moment, the normal rate of VAT is 20% but this does vary according to the type of product or service.
A business, regardless of it’s a sole trader, a limited company or if you are working as a freelancer, must register with HMRC for VAT once you know your annual turnover will exceed the VAT registration threshold – which is currently £85,000. You can apply to register voluntarily before your turnover reaches this level, and that might be tax-efficient for your business especially if you are buying goods and services that already include VAT.
Once your business is registered for VAT you need to charge your customers VAT at the appropriate rate for the product or service being sold. You can also claim back VAT your business has paid out to another business when buying goods or services.
In this article we’ll go through the key points you need to know as a sole trader and VAT (read our related article for a background to the benefits of registering as a sole trader).
Example of charging and reclaiming VAT
For example, if your business sells a laptop before you are registered for VAT you might charge a customer £1000 and the invoice would show £1000. Once you are registered for VAT your invoice to the customer would show £1000 + £200 VAT at 20% = £1200 total.
If your VAT-registered business bought the laptop from another VAT-registered business and you paid £800 + VAT for it (£800 + £160 VAT = £960 total) then you could claim back the £160 as part of your VAT return. In this example, your VAT return would show £200 VAT received and £160 VAT paid so you would need to pay HMRC £40.
Should I register for VAT as a sole trader?
If you are a sole trader, you can decide if you want to register for VAT until your annual turnover reaches the VAT registration threshold (currently £85,000). Once your turnover exceeds £85,000 you must register for VAT.
VAT for sole traders with more than one business
If you’re a sole trader or self-employed then remember that there is no legal separation between you and your business. In practice, this means that if you have several sole trader businesses you need to add together the revenue or income from all of them to calculate if you need to register for VAT.
As an example, if your weekday job is as a sole trader plumber and have sales of £70,000 in the last 12 months but you also have a weekend market stall under a different sole trader name and have sales of £20,000 then your total income is £90,000 so you have exceeded the VAT registration threshold and you must register for VAT.
How do I register for VAT?
Online VAT registration makes it easy to apply to register on the HRMC website. Once HRMC approves your application, you will receive confirmation within 30 days together with a unique VAT number for your business. These details will also be present on your VAT registration certificate. You must then charge VAT on all sales and include your VAT number on all invoices.
When Should I Start Charging VAT?
It would be best if you started charging VAT on all taxable sales right after registering for it. Whether the registration is voluntary or a result of an HRMC notice, you must follow the VAT rates immediately.
What rate is VAT for sole traders?
VAT rates are the same for all business types (ie the same for a sole trader as a limited company) – but they do vary according to the category of product or service. Currently, there are three levels of VAT rates in the UK:
- 20%: This standard or regular VAT rate applies to most services and goods.
- 5%: This reduced tax rate applies to select goods and services sold at lower rates. For example, children’s toys and clothing have 5% VAT rates.
- 0%: Most food, books and magazines are zero-rated and sold with a 0% VAT rate.
Please note that these rates are liable to change. For more information, view the HMRC rates for the UK.
The UK government temporarily lowered the VAT rates on businesses related to hospitality and tourism during and just after the coronavirus pandemic as an initiative to boost the economy. However, the government removed this and returned to the normal rates on March 31, 2022.
Benefits of VAT for sole traders
There are several benefits to registering for VAT as a sole trader.
- If you register for VAT, it could give the impression of a bigger brand. Generally, large firms register for VAT, which could even increase your goodwill.
- You need raw materials to run your business. Even when you trade goods, you must buy them from the manufacturer first. Your seller may charge you more for these goods if he or she is VAT-registered. However, if you register for VAT, you can reclaim the VAT you pay from the HRMC.
- If you voluntarily register for VAT, you do not need to monitor your turnover. The HRMC penalties can be tough to deal with if you accidentally cross the turnover threshold without registering.
- Another great benefit of registering is reclaiming the VAT from your old purchases. If you save all invoices for your purchases four years before the registration, you can reclaim the VAT you paid on them.
- Registration will not affect your sales prices with other VAT companies. They can reclaim the VAT they pay you the same way you do from the HRMC.
Disadvantages of registering for VAT
While it is generally beneficial for a small business owner or sole trader to register for VAT, there are some drawbacks. Firstly, if you deal with non-VAT companies, they will not be able to reclaim the taxes they pay you. So, they may ask for other forms of discounts since your products might be costly.
Moreover, you might face issues like a VAT bill. This situation occurs if you generate more VAT from selling goods and services than you paid. Lastly, registering for VAT may cost you some extra time and money. You need to keep track of all your VAT paperwork, so you must hire an accountant for it.
Frequently Asked Questions
- Do I need to charge VAT if I am a sole trader or self-employed?
If you run any business, you must follow the VAT registration rules. Whether a sole trader or a freelancer, you must register for VAT if your turnover exceeds £85,000 in the last 12months. You are liable to penalties if you do not follow the rules and register even after you cross the taxable turnover threshold.
- What is the threshold to register for VAT?
VAT registration thresholds will remain the same for two years, starting April 1, 2022. So, until March 31, 2024, the VAT taxable turnover threshold is £85,000.
- How do I avoid hitting the VAT threshold?
If you keep your taxable turnover below the threshold you do not have to register for VAT. For example, if you are a plumber you could stop working when your turnover gets close to the threshold and then start again when it has reduced as a total over the last 12 months.
If you are a sole trader, you need to register for VAT if your taxable turnover (your sales) are over £85,000 for the last 12 months. You can also register voluntarily, which has advantages if you are buying goods and services that include VAT.