Sole Trader VAT Registration Guide  

As a sole trader if your total taxable VAT turnover exceeded £90,000 at the end of any given month over the past year it’s mandatory for you to register for VAT.

You’re required to complete your registration within 30 days following the month wherein your turnover surpassed the threshold.

A sole traders taxable turnover determines whether you need to register for VAT or not but voluntary registration is possible and can have advantages like claiming back input tax on business expenses.

Voluntary VAT registration is a strategic decision that some sole tradership businesses choose to make even when they’re not legally required to do so.

Understanding VAT thresholds and regulations is important for sole traders to comply with HMRC and make the most of any benefits from becoming a VAT registered sole tradership.

How does a Sole Trader register for VAT online?

If you think voluntary VAT registration is better for your business than staying unregistered or you’re turnover is at the mandatory threshold level then you can apply online through HMRC’s website.

Step 1: Go to HMRC’s website and find the VAT registration page.

Step 2: Create an account or log in with your government gateway credentials. If you don’t already have a government gateway account you can set one up.

Step 3: Fill out the online form with accurate information about your business. For voluntary registrations make sure to clearly communicate your reasons for choosing voluntary registration during the application process. This helps to ensure a clear understanding of the responsibilities between both parties.

Step 4: Submit your application and wait for confirmation from HMRC which may take several weeks depending on their workload.

After your online VAT registration has been processed HMRC will create a digital VAT account for your business and send you a unique nine digit VAT number which you should use on all of your businesses invoices.

What is voluntary VAT registration?

Voluntary VAT registration is when a business chooses to register for Value Added Tax (VAT) even if their taxable turnover is below the compulsory threshold of £90,000.

Who is eligible for voluntary VAT registration?

A business that makes taxable supplies or intends to do so in the future, including selling goods or services subject to standard, reduced, or zero rated tax rates can opt for voluntary registration.

Benefits of voluntarily registering for VAT for Sole Traders

There are several advantages associated with voluntary VAT registration that can outweigh the extra administrative burden.

• Making your business appear more established: Displaying a VAT number on invoices and other documents can help build trust with potential clients or customers.
• Claiming back input tax on purchases: As a registered business you’re entitled to claim back any input tax paid on goods and services potentially reducing overall costs.
• Recovering pre registration input tax: You may also be able to recover some of the VAT incurred before registering if it meets certain criteria outlined by HMRC.
• Reducing costs when dealing with EU suppliers: Being registered for VAT allows you to avoid paying additional local taxes when purchasing from EU based suppliers as part of the reverse charge mechanism under specific circumstances.
• VAT schemes: If your business qualifies you can use a VAT scheme to help alleviate the administrative load that comes with VAT reporting and record keeping.

So if you’re looking to give your business a more professional image, save money on eligible expenses, and avoid extra taxes voluntary VAT registration could be worth considering.

Cons of voluntary VAT registration for Sole Traders

Despite potential benefits voluntary VAT registration may not suit every business, with pricing challenges for customers who can’t claim back input tax, extra admin work under making tax digital rules and cash flow management concerns.

• Pricing issues affecting sales and profits: Charging VAT may impact customers who can’t reclaim input tax potentially affecting sales and profitability.
• More reporting requirements and software needs: VAT registration can mean stricter record keeping and software that complies with making tax digital.
• Effective cash flow management: Paying output tax and submitting regular returns requires a robust system for managing business cash flow.

VAT schemes for Sole Traders

HMRC makes available a number of VAT schemes to simplify the procedures of accounting and reporting.

If a VAT scheme works for your business it can potentially reduce the complexity associated with your VAT returns and provide a clearer view of your VAT obligations enabling a more precise assessment of the all important cash flow.

The VAT amount that businesses charge on their products and services remains the same and joining these schemes is not mandatory.

Reviewing which VAT program(s) might be available to you based on your VAT taxable income and the nature of your business is recommended.

Here are some examples of VAT schemes for sole traders:

• VAT flat rate scheme: Is for small businesses with a turnover of less than £150,00 in the year you join. It involves calculating your VAT by applying a single percentage to your turnover which determines the amount you owe to HMRC.

Primarily the flat rate scheme is often viewed as a significant time saving tool as it eliminates the need to document individual VAT on purchases and sales.

• The annual VAT accounting scheme: If your annual VAT taxable income is £1.35 million or below, you might be eligible for the annual accounting scheme. This scheme allows you to submit only one VAT return per year instead of the usual four.
• The VAT cash accounting scheme: This scheme lets you pay VAT to HMRC when your customers pay you, instead of when you invoice them.
• A VAT margin scheme: If you’re in the retail business or deal with used goods, you might be able to adopt the margin scheme. This scheme allows you to pay VAT on the increased value of the goods you sell, rather than on each product’s total selling price.

Charging VAT without registration

Sole trader businesses that are not registered for VAT cannot charge their customers any form of value added tax.

VAT reclaim for Sole Traders

Sole traders can claim back input tax on eligible purchases made by their business if they have voluntarily registered for VAT.

Understanding VAT taxable turnover

VAT taxable turnover refers to the total value of sales subject to standard rated or reduced rate supplies within a 12 month period.

People often mix up the terms ‘turnover’ and ‘profit’, but they are quite distinct. Profit is what’s left after all required expenses have been covered whereas turnover is the gross amount accumulated over a specific timeframe.

When it comes to taxable turnover this is usually the past 12 months (though it can be any 12 month period).

Find out which goods and services attract different rates to help work out your taxable turnover for VAT.

Making tax digital for VAT

HM Revenue & Customs’ (HMRC) making tax digital (MTD) for VAT initiative encompasses all VAT registered businesses barring those granted exemptions.

New VAT registrants will simultaneously be enrolled for MTD for VAT by HMRC so you don’t need to make a separate application.

The core components of the MTD for VAT regulations encompass:

• Mandatory maintenance of business records digitally and establishing digital connections where required.
• Compulsory submission of the quarterly VAT return through API (‘application programming interface’) supporting software.

Maintaining your VAT records in a digital format and using compatible HMRC VAT return software are both essential for adhering to HMRC regulations helping your steer clear of HMRC MTD for VAT penalties.