As a sole trader, whether or not you have to pay Value Added Tax (VAT) depends on how much money your business makes. Basically, you need to sign up for VAT if you made more than £85,000 in sales in the 12 months before the end of any given month.
You can also sign up for VAT on your own, even if your sales are below the threshold. Some sole traders choose to do this so they can get the VAT back on goods and services they bought for their business or so they don’t get fined if they go over the threshold by accident.
Below, we talk about how to sign up for VAT as a sole trader, how much you need to pay, VAT rates, charging customers VAT, and Making Tax Digital (MTD) for VAT.
Registering for VAT as a sole trader
With HMRC, you can sign up for VAT online. Once your business is approved, you should get a unique VAT number within 30 days. This number is only for your business.
It will be on a VAT registration certificate, which will also tell you when you need to file your first VAT Return and the date you were officially registered (the date when you started to pay VAT).
Whether you use your own name or the name of your business, your VAT registration will be under that name.
VAT Rates as a Sole trader
There are three different levels of VAT:
- Standard rate – currently 20%, this applies to the majority of goods and services
- Reduced rate – currently 5%, this applies to a very select set of goods and services, such as children’s car seats and home energy
- Zero rate – 0%, which applies to most food and children’s clothes
You can find the full list of VAT ratings and exemptions here: VAT rates on different goods and services.
(NB – There are also VAT-exempt items, for which you cannot claim back input VAT on expenses used to produce the zero-rated good. You can find a comprehensive explanation of this here: Help With HMRC)
VAT collection on consumer-purchased products and services
On your sales invoices, you must add the VAT part. For example, if your invoice is for £1,000, the client will pay you £1,200 after adding £200 (20%) to the total cost of the product or service.
Every three months, you have to fill out a VAT return that lists the amount of VAT you collected from customers and the amount of VAT you paid to suppliers (Input VAT).
If the output VAT is more than the input VAT, you have to pay the difference to the HMRC. But if the VAT you put in was more than the VAT you put out, you can ask HMRC to give you back the difference.
For VAT, MTD
Making Tax Digital for VAT is a set of rules that all businesses with a VAT number must follow by April 2022, no matter how much money they make. Making Tax Digital is part of the government’s plan to completely digitise the UK tax system.
To be in compliance, you must send your quarterly VAT returns using software that is approved by HMRC and keep digital VAT records.
Three VAT Public Notices which offer relevant advice are:
- Notice 700 – VAT General Guide
- Notice 700/1 – Should I be registered for VAT?
- Notice 700/15 – The ins and outs of VAT
- These can be located here
Call the VAT helpline at 0845 010 9000 if you have any questions.
Here is where you can get the whole Application for Registration – VAT 1 file.
Talk to your accountant if you have any questions. They can explain your criteria, answer any questions you have, and even fill out your VAT return for you.
How can you quickly monitor your profits?
Making Tax Digital for VAT compliance may be made easier using accounting software, making it simpler to monitor your company’s cash flow and profitability in general.
There are several suppliers from which to choose. Below, we’ve compiled three of the greatest.