Do I Charge VAT as a Sole Trader?

Whether you need to register your business for VAT or not is determined by the value of your business’s taxable turnover, rather than the type of business in operation.

You can register for VAT through mandatory or voluntary registration. When your business’s revenue exceeds the VAT registration threshold, you must check whether this constitutes taxable income and therefore whether you are required to register for VAT. It is important to keep in mind that once you are a VAT-registered trader, you must charge VAT on sales at the appropriate rate. 

There are two conditions for mandatory VAT registration, and you must register if either one of the following tests are met:

1

Keep a 12-month rolling total of the value of taxable supplies made. When the running total reaches the VAT registration threshold (£85,000), you must notify HMRC of your requirement to register within 30 days of the end of the month in which you exceeded the VAT registration threshold.

For example, if your VAT taxable turnover reaches £85,000 in the 12-month period ending August 31, 2022, you must register for VAT by September 30, 2022. Typically, you will be obligated to charge VAT on your sales from October 1, 2022.

It is important to note that you must register for VAT if your VAT taxable turnover in any consecutive 12-month period exceeds the registration limit - not simply the amount of VAT taxable turnover in your 12-month accounting period.

2

If you suspect that your VAT taxable turnover in the next 30-day period alone will exceed the VAT registration threshold, you must register at the earliest opportunity.

Once registered for VAT, you must charge VAT at the correct rate on your sales invoices and file VAT returns. You can find more information on the various VAT rates here. 

It can be difficult to know whether your current VAT processes are still fit for purpose and VAT-compliant. To ensure that you don’t unintentionally fail to comply with VAT rules, you can undertake a VAT health check.

Voluntary VAT registration

Even if you are not required to register for VAT because you do not meet the registration threshold, you may still choose to do so - this is known as voluntary registration. For sole traders, this is often beneficial as it allows for the recovery of input tax incurred in the course of making taxable supplies (i.e. those on which output VAT is charged), although this should be weighed against the requirement to charge customers VAT, as if customers are non-business persons, or not registered for VAT, this would represent an irrecoverable cost.

If you are considering registering for VAT, contact the experts at The VAT People to receive bespoke and in-depth consultation. We have long helped sole traders find ways to maximise their VAT payments and use their VAT obligations to their advantage. Contact us today to see how you can benefit from VAT advice, by calling 0330 8284 289 or filling out our contact form here.

FAQs about charging VAT as a sole trader

When am I obliged to register for VAT as a sole trader?

You are obliged to register for Value Added Tax (VAT) as a sole trader if your taxable turnover exceeds the VAT registration threshold, which is currently £85,000 in the United Kingdom. This threshold is calculated on a rolling 12-month basis, not a financial year. If you anticipate that your turnover will exceed this threshold in the next 30 days alone, you must also register for VAT immediately.

Do sole traders need to charge VAT?

Yes, if you are a sole trader and have registered for VAT, you are required to charge VAT on the goods and services you provide. The standard VAT rate is 20%, although there are reduced rates, zero rates and exemption applicable to certain types of goods and services. You must also issue VAT invoices to your customers, detailing the VAT charged.

How does VAT work when self-employed?

When you are self-employed and registered for VAT, you must charge the appropriate VAT rate on your sales invoices. You are also entitled to reclaim VAT on your business-related purchases. Every quarter, you are required to submit a VAT Return to HM Revenue and Customs (HMRC), summarising your VAT sales and purchases. You will either pay the difference if you have charged more VAT on your supplies (output VAT) than you have paid (input VAT) or receive a refund if you have paid more VATthan you have charged.

What is the main advantage of registering for VAT as a sole trader?

Registering for VAT as a sole trader has the advantage of being able to reclaim VAT on business-related purchases, reducing your overall costs.

VAT registered businesses may wish to consider the following schemes, which can simplify your VAT accounting:

Cash flow management: With schemes like the Cash Accounting Scheme, you only pay VAT when your customer pays you, aiding in cash flow.

Flat rate scheme: This scheme allows businesses to pay a fixed rate of VAT (dependent on the nature of supplies) to HMRC, retaining the difference between VAT charged to customers and that paid to HMRC, although input VAT cannot be reclaimed on purchases, aside from the purchase of certain capital assets. 

Can sole traders benefit from VAT technology?

Absolutely, sole traders can significantly benefit from VAT technology, such as those relating to Making Tax Digital. Software solutions can automate the VAT calculation, invoicing, and filing processes, thereby reducing manual errors and saving time. Many of these software solutions are recognised by HMRC and can directly submit your VAT Returns, making compliance easier and more efficient.

For further queries, it is advisable to consult with a VAT specialist to understand your specific circumstances and obligations.