Can I Claim VAT Back as a Sole Trader?

If you are self employed, you may be asking: can you claim VAT back as a sole trader? The answer depends on whether you are VAT registered, what the purchase was used for, and whether you hold the correct VAT evidence.

A sole trader can usually reclaim VAT only where they are VAT registered and the cost relates to taxable business activity. This means VAT recovery is not the same as claiming a cost as a business expense for income tax or Self Assessment purposes.

In this guide, we explain when you can claim VAT back, what you can claim VAT back on, how businesses claim back VAT through a VAT return, and when it may be worth taking advice.

Can a sole trader get VAT back?

A sole trader can get VAT back if they are VAT registered and the purchase relates to taxable supplies made by the business. A VAT registered business can usually reclaim VAT on goods and services used for business purposes, provided the VAT was correctly charged and the business holds valid VAT invoices.

If you are not VAT registered, you normally cannot reclaim VAT through a VAT return. You may still be able to treat the full cost of the purchase as a business expense for income tax purposes, but that is separate from a VAT claim.

For example, if a self employed consultant buys office supplies before registering for VAT, they cannot simply claim VAT back unless the pre-registration VAT rules apply. If the same consultant becomes a VAT registered trader and the cost meets the rules, the position may be different.

When do sole traders need to register for VAT?

A sole trader must register for VAT if taxable turnover exceeds the VAT registration threshold. The current VAT registration threshold is £90,000. This applies where total taxable turnover for the last 12 months goes over £90,000, or where taxable turnover is expected to go over £90,000 in the next 30 days.

Once registered, HMRC issues a VAT number. From the effective registration date, the sole trader must charge VAT where required, keep VAT records and submit VAT returns.

Some sole traders choose to register voluntarily before their annual turnover reaches the threshold. This may be useful where most customers are VAT registered businesses and can reclaim VAT themselves. However, it may be less attractive where customers are private individuals or businesses that cannot recover VAT, because adding VAT may increase prices.

When can you claim back VAT as a business?

You can claim back VAT as a business when the main VAT recovery conditions are met.

To reclaim VAT, the business must usually be VAT registered. The purchase must be used for business purposes and linked to taxable goods or services supplied by the business. You must also hold valid VAT invoices or other acceptable evidence showing how much VAT was charged.

VAT cannot usually be reclaimed on costs that are only for personal use, goods and services used to make VAT-exempt supplies, client entertainment, goods bought under certain second-hand margin schemes, or business assets transferred as part of a going concern.

This means most business expenses need to be reviewed by reference to how they are used. If a purchase is used for both business and personal use, only the business use proportion of the input VAT should normally be claimed.

What can I claim VAT back on?

A VAT registered sole trader may be able to claim VAT back on business related purchases, including:

• stock and goods purchased for resale
• tools, equipment and machinery
• office supplies
• business software and accounting software
• professional services, such as accountancy or legal fees
• marketing and advertising
• business travel costs
• mobile phone and internet costs, where business use can be identified
• rent, utilities and other premises costs
• capital assets used for taxable business activity
• import VAT, where the business is the importer and holds the correct evidence

The key point is that the cost must relate to the VAT registered business. VAT paid on private costs, or costs related to exempt activity, cannot normally be reclaimed.

For mixed-use costs, such as a mobile phone used for both business and personal use, the VAT claim should be restricted to the business proportion. Records should show how the split has been calculated.

What can’t you usually claim VAT back on?

A sole trader cannot usually claim VAT back on:

• personal purchases
• entertaining clients
• goods or services used only for VAT-exempt supplies
• costs without VAT invoices or valid VAT receipts
• VAT incorrectly charged by a supplier
• the personal use proportion of mixed-use purchases
• most cars, unless strict business-only use conditions are met
• purchases made under a VAT margin scheme
• costs that do not relate to the VAT registered business

This is where VAT compliance can become more complex. A purchase may be allowable for income tax, but that does not automatically mean input tax can be reclaimed on the VAT return.

Can you claim back VAT before registration?

Yes, in some cases. Pre-registration VAT can sometimes be reclaimed once the business becomes VAT registered.

For goods, VAT can usually be reclaimed where the goods were bought up to four years before registration, are still held at the registration date, and are used for the registered business. For services purchased before registration, the time limit is usually six months.

The goods and services must relate to the business now registered for VAT and must support taxable supplies. Valid VAT invoices should be retained, and the claim should be made carefully on the first VAT return or relevant VAT period.

This can be valuable where a sole trader has bought stock, equipment or capital assets before registering for VAT. However, the rules are specific, and errors can lead to HMRC queries.

How do businesses claim back VAT?

Businesses claim back VAT by submitting a VAT return to HMRC.

The VAT return records output VAT charged on sales and input VAT paid on eligible business purchases. If output tax is higher than input tax, the business will usually pay VAT to HMRC. If input VAT is higher than output VAT, the business may receive a VAT refund or repayment.

Most VAT registered businesses submit quarterly VAT returns. HMRC also requires most VAT registered businesses to keep digital records and submit VAT returns using Making Tax Digital compatible software.

A sole trader should keep a clear VAT account showing VAT charged, VAT paid, adjustments and the amount due to or from HMRC.

How long do VAT refunds take?

A VAT refund may arise where the input VAT claimed on business purchases is higher than the output VAT charged on sales.

HMRC states that VAT repayments are usually made within 30 days of receiving the VAT return. Repayments can take longer where HMRC needs to check that the VAT return is accurate.

A VAT refund can be useful for cash flow, particularly where a sole trader has bought significant stock, equipment or capital assets. However, a repayment claim must be supported by proper records and valid VAT invoices.

What records do sole traders need?

Sole traders must keep records to support each VAT claim. This includes:

• VAT invoices
• VAT receipts where appropriate
• supplier invoices and statements
• import VAT evidence
• postponed import VAT statements
• purchase records
• VAT return workings
• business mileage records, where relevant
• evidence of business use for mixed-use costs
• details of any VAT adjustments

VAT records should normally be kept for at least six years. VAT records should include VAT on supplies made and received, VAT return adjustments and reverse charge transactions.

Valid VAT invoices should include key details such as the supplier’s VAT number, the goods or services supplied, the date, value, VAT rate and VAT amount. Weak records can lead to VAT claims being refused or challenged.

Is it worth going VAT registered as a sole trader?

It can be worth going VAT registered as a sole trader, but it depends on the business.

Voluntary registration may be beneficial where:

• most customers are VAT registered and can reclaim VAT
• the sole trader has significant VAT-bearing business expenses
• the business is buying equipment, stock or capital assets
• registration supports growth or credibility
• the business is likely to exceed the VAT registration threshold soon

However, registering for VAT also means additional responsibilities. A VAT registered sole trader must charge VAT where required, submit VAT returns, keep digital records where Making Tax Digital applies, and manage VAT compliance on an ongoing basis.

If customers cannot reclaim VAT, charging VAT may make the business more expensive. This can affect pricing, margins and competitiveness.

Can a sole trader claim back tax?

A sole trader may be able to claim back tax in different ways, but VAT and income tax are separate.

For Self Assessment, a sole trader may claim allowable business expenses against taxable profits. This reduces income tax, but it is not the same as reclaiming VAT.

For VAT, a sole trader can claim back VAT only where the business is VAT registered and the VAT recovery rules are met. This is why it is important not to confuse a tax return expense claim with a VAT return input tax claim.

Is it worth claiming a VAT refund?

It is worth claiming a VAT refund where the claim is valid, properly evidenced and relates to eligible business purchases.

A VAT refund can improve cash flow and reduce the cost of business investment. However, repayment claims can be checked by HMRC, especially where the claim is large, unusual, or inconsistent with previous VAT returns.

Before submitting a VAT claim, a sole trader should check that the VAT was correctly charged, the cost relates to taxable business activity, valid VAT invoices are held, and any personal use has been excluded.

Common mistakes when sole traders claim VAT back

Reclaiming VAT as a sole trader can reduce business costs, but the rules must be applied carefully. VAT can usually only be recovered where the business is VAT registered, the cost relates to taxable business activity and the correct evidence is held. Mistakes often arise where personal costs, exempt activity or incomplete records are included in a VAT claim.

Common mistakes include:

• trying to reclaim VAT without being VAT registered
• claiming VAT on personal use costs
• not holding valid VAT invoices
• claiming VAT on exempt business activity
• failing to apportion mixed-use expenses
• treating income tax rules and VAT rules as the same
• claiming VAT incorrectly on cars, fuel or travel expenses
• missing pre registration VAT claims
• claiming VAT that a supplier charged incorrectly
• poor record keeping
• failing to submit a VAT return on time

These errors can result in VAT assessments, penalties, interest and unnecessary HMRC scrutiny. The VAT People can help sole traders review VAT claims, identify errors, correct historic issues and put the right processes in place for accurate VAT returns.