Sole Trader VAT Guide

Sole traders are required to pay VAT on most business related costs and some may charge customers VAT on their goods or services.

The VAT rate normally used for both business costs and billing customers is set at 20%.

A sole traders taxable turnover is one of the main factors that decides whether a sole trader needs to register for VAT.

Different thresholds determine mandatory registration for VAT purposes along with the process of applying for exemptions and VAT schemes.

HMRC allows sole traders to register for VAT on a voluntary basis with there being potential benefits and drawbacks associated with choosing voluntary registration.

By gaining a deeper understanding of these topics surrounding VAT Registration for a sole trader you can make informed decisions about your own business operations and ensure full compliance with HM Revenue & Customs requirements.

Are Sole Traders required to register for VAT?

The obligation to charge VAT depends on taxable turnover which is the total amount of sales made that are not exempt from VAT.

Sole traders must register for VAT if their taxable turnover exceeds £90,000 in a twelve month period.

If the taxable turnover exceeds the threshold set by HMRC, they must register for value added tax and start charging customers VAT on applicable goods and services.

If the turnover is below the threshold they are not required to register for or charge VAT.

Sole traders can also voluntarily register for VAT which may allow them to reclaim input tax paid on purchases made within their business operations.

Do Sole Traders pay VAT?

Yes, a sole trader should pay VAT on the goods and services they purchase for their business.

Can Sole Traders claim VAT back?

Yes, once registered for VAT sole traders can reclaim input tax on eligible business expenses and purchases made for the purpose of running their business.

What is a VAT registered trader?

A VAT registered trader is an individual or entity that has successfully applied for Value Added Tax (VAT) registration with HM Revenue & Customs, allowing them to charge and collect VAT on sales and reclaim input tax on eligible expenses.

What are the VAT thresholds for Sole Traders?

For all businesses including sole traders the VAT threshold is £90,000 or more in taxable turnover.

A partial exemption (known as exempt input tax) from VAT is possible if you are already VAT registered and your business has paid VAT on purchases related to exempt supplies.

You may be able to exempt yourself from VAT registration if the majority of your sales are zero rated. Typically this applies to services deemed essential by the government for example education, training and funerals.

Determining if an item is VAT free can be complicated and it’s recommended that you seek advice from a tax professional or HMRC before making a decision.

HMRC provides a detailed list of products that are exempt from VAT for reference.

Should you voluntarily register for VAT as a Sole Trader?

Even if your taxable turnover is below £90,000 registering for VAT can be advantageous as you can reclaim input tax on purchases made within your business operations.

Before making a decision you should consider the potential drawbacks such as increased administrative workload.

• Potential advantages of voluntary registration: Reclaim input tax, increase credibility, better cash flow management.
• Disadvantages and potential issues: Increased administrative workload, filing regular VAT returns, possible price increase for customers not able to reclaim VAT.

VAT Schemes for Sole Traders

VAT schemes are available to help streamline the process of accounting and reporting to HMRC.

They don’t alter the VAT amount that businesses levy on their goods and services and participation in these programs is optional.

Depending on your VAT taxable income and business nature you may qualify to enrol in various VAT schemes.

Examples of VAT schemes that may be available to sole traders include:

• VAT annual accounting scheme: If your VAT taxable income annually is £1.35 million or less you might qualify for the annual accounting scheme where you only need to file a single VAT return yearly as opposed to the standard four.
• VAT flat rate scheme: Was launched to make the VAT part of transactions easier for small businesses with a turnover of less than £150,000 in the year of joining the scheme.

The VAT flat rate scheme is seen as a potential time saving option as it removes the requirement to record individual VAT on purchases and sales.

It might also give a more transparent picture of your VAT responsibilities which can make it easier to evaluate your cash flow.

The scheme involves applying a single percentage to your total sales which calculates the amount of VAT you must pay to HMRC.

• The VAT cash accounting scheme: Which allows you to pay VAT to HMRC when you receive payment from your customers rather than when you bill them.
• VAT margin scheme: For businesses in retail or those dealing in used goods it could be possible to implement the margin scheme. It permits you to pay VAT on the added value of the goods you sell rather than on the total selling price of each product
• One of the three VAT retail schemes: Which enables you to calculate the VAT once per VAT return instead of for each sale you execute.

VAT registration and multiple businesses

All of your business activities as a sole trader are considered together when determining if you meet the VAT threshold and if the combined taxable turnover exceeds £90,000 within a 12 month period you must register for VAT.

This can potentially lead to pricing and margin complications among customers across both businesses.

To mitigate this risk and possibly reduce administrative costs it’s worth considering incorporating your businesses.

Benefits of incorporating sole traderships for VAT include:

• Incorporating each business as a limited company can help manage their individual tax obligations more effectively.
• This separation allows each entity to maintain its own financial records and potentially avoid registering for VAT if they do not individually exceed the threshold.

Is it possible to unregister a Sole Trader from VAT?

Yes HMRC usually let you unregister (also known as VAT deregistration) from VAT if your revenue drops under the VAT deregistration limit of £88,000.

You should also deregister if you are part of a VAT collective or cease business operations by following HMRC’s cancelling your VAT registration process.

What happens if I temporarily surpass the VAT limit?

If your yearly revenue momentarily goes over the VAT limit but swiftly drops significantly below the threshold you can request for a ‘dispensation’ from registration.

For this to be successful you must present evidence to HMRC demonstrating that your taxable sales income will persistently stay under the VAT deregistration limit over the forthcoming 12 months.

Making tax digital for VAT

The initial phase of HM Revenue & Customs’ (HMRC) making tax digital initiative is the making tax digital (MTD) for VAT.

Since its start on 1 April 2019 it has been rolled out gradually and is now applicable to all businesses registered for VAT except those who have been exempted.

The key aspects of the MTD for VAT regulations are:

• An obligation to maintain business records digitally integrating digital connections where needed.
• An obligation to submit the quarterly VAT return using software that supports API (‘application programming interface’).

Sole traders who newly register for VAT will be automatically enrolled for MTD for VAT simultaneously with no need for a separate making tax digital for VAT application.

As a Sole Trader how do I register for VAT?

HMRC let you register for VAT online after which HMRC will set up a VAT online account for your business and give you a unique nine digit VAT number.

Our VAT registration guide for sole traders gives further information on how the VAT registration process works and what to expect following a successful application.