Why and how sole traders can become VAT registered

Becoming a sole trader is one of the easiest ways to set up a new business. You will have complete control of your operations, and be the sole decision maker.

One of those decisions will concern Value Added Tax (VAT). You will need to decide whether your self-employed business merits voluntary VAT registration or not. This decision that will affect your customers as well as your business, so it is a big choice to make. 

What does VAT registered mean?

VAT is a consumption tax added to the value of goods and services in the UK.

VAT registered refers to business who have registered for VAT with HM Revenue and Customs (HMRC). 

How much VAT does a sole trader pay?

The standard VAT rate on most goods and services is 20%. 

The reduced rate of 5% applies to some items, such as children's car seats and home energy. The 0% (zero-rated) rate of VAT applies to most food and children’s clothing. 

As a VAT-registered sole trader, you will be legally responsible for calculating and charging VAT to your customers. A sole trader will pay the difference between VAT on sales and VAT on purchases to HMRC. You must report VAT to HMRC using VAT returns. 

The benefits of registering for VAT

By registering for VAT as a sole trader there are multiple benefits you can enjoy as a business owner. You can register voluntarily if your annual turnover doesn't exceed the annual threshold. 

Guard against financial penalties for creeping over the VAT registration threshold

It’s not uncommon for some sole traders to creep over the VAT registration threshold and fail to register for VAT. Late VAT registration will incur a financial penalty from HMRC. By registering voluntarily, you can sidestep the fear of overlooking the turnover threshold and focus on doing what you do best.

Enhance your brand’s reputation as a serious business

Being VAT registered can help establish your growing business as a serious competitor in your market, alongside well-established firms. 

Claim back VAT on goods or services bought for your business

From the moment your business is VAT-registered, you can reclaim input VAT on purchases. Sole traders selling zero-rated products may receive a VAT refund after submitting their VAT returns. This is because the input VAT on standard-rated expenses may exceed the output VAT. 

Reclaim VAT on goods bought up to four years from your date of registration

Businesses may be able to reclaim VAT paid on business goods purchased four years before VAT registration. To claim input VAT, your business must have traded continuously, possess VAT invoices, and continue to use the goods. For services you only have up to six months before to claim.

Can I claim VAT back if I am not VAT registered?

You do need to be VAT-registered to reclaim VAT. As a VAT registered sole trader, you will need to ensure you maintain VAT records to make an acceptable refund claim. 

How does VAT work for sole traders?

Do I need to charge VAT if I am self-employed?

You should be charging VAT to customers as a self-employed professional once you exceed the VAT registration threshold. Once you earn beyond this figure it is compulsory for any sole trader to register for VAT with HMRC. 

What is the VAT threshold for a sole trader?

As a sole trader, you must register for VAT when: 

• your annual turnover from the previous 12 months amounts to more than £90,000 
• your turnover will go above £90,000 in the next 30 days 

Once you have registered for VAT, you will receive a VAT registration certificate. The certificate will detail your business’ unique VAT number and the due date for your first quarterly VAT return. 

VAT-registered sole traders will also sign up for Making Tax Digital (MTD) for VAT. This will require you to maintain digital records of your VAT using software that’s compatible with HMRC systems. 

How to become VAT registered

If you want to become a VAT registered sole trader, you must register with HMRC. 

The majority of sole traders will be able to register for VAT online. By registering for VAT, you will have a new VAT online account – also known as a Government Gateway account. This account will be your vehicle for submitting quarterly VAT returns to HMRC. 

There are three types of businesses that must register for VAT by post instead: 

• EU-based businesses ‘distance selling’ to the UK (registering with a VAT1A form) 
• Businesses importing goods valued over £90,000 from an EU country (registering with a VAT1B form) 
• Businesses disposing of assets on which 8th or 13th Directive refunds have been claimed (registering with a VAT1C form) 

Once approved, your VAT registration certificate should be available on your VAT online account within 30 working days. 

How we can help

TaxAssist Accountants can assist you in registering and managing your VAT affairs. We can act as your agent by preparing and submitting VAT returns and liaising with HMRC on your behalf. We'd be pleased to speak to you about your VAT registration as a sole trader. Call our friendly and experienced team today on 01827 337 222 or use our online enquiry form.

Date published 26 Jun 2020 | Last updated 13 Sep 2024

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

---