Why and how sole traders can become VAT registered

Many people when they first set up a business decide to trade as a sole trader. But just because youre a sole trader and not a limited company doesnt mean you cant or wont need to register for VAT.

This blog covers all you need to know about VAT registration and why and how sole traders can become VAT registered.

What is VAT registration

VAT stands for Value Added Tax and is a general tax placed on almost all goods and services sold. Put simply, VAT is a tax that consumers pay on products they buy based on the value of the product. VAT rates are percentage based and there are several different VAT rates depending on the product.

How much VAT does a sole trader charge or pay?

This will depend entirely on the goods or services youre selling or buying. For many products and services however, the standard VAT rate s is 20%.

Some items, are charged at 5% VAT rate and some are zero-rated and don’t incur a penny in VAT. Go to the HMRC website to check the latest VAT rates.

VAT responsibilities for sole traders

If you decide to register for VAT as a sole trader you are legally responsible for charging VAT to your customers. You must then report the VAT you charged to HMRC via quarterly online VAT returns.

Do I need to register for VAT?

Not every sole trader has to register for VAT. You only need to compulsory register for VAT if your annual turnover will be more than £85,000 in a 12 month period. This is called the VAT threshold. Once you hit the VAT threshold it is compulsory for a sole trader to register for VAT with HMRC.

Every person / business that is VAT registered needs to submit digital VAT returns to HMRC as part of Making Tax Digital for VAT (MTD).

Voluntary registration for VAT for sole traders

Even if you dont hit the £85,000 turnover to have reached the compulsory registration threshold, you can choose voluntary registration for VAT. Some people do as there can be benefits to being VAT registered. See below.

When do I have to register for VAT?

If you you reach the end of a month, and your annual turnover from the previous 12 months is more than the VAT registration threshold, then you must register for VAT. You should also register for VAT if you think you will go over the registration threshold within the next 30 days of trading.

The benefits of registering for VAT for sole traders

There can be benefits of being registered for VAT. Here are some of the VAT registration benefits below:

What are the benefits of being VAT registered?

• It can make you look like a bigger business or enhance your brand if you’re charging VAT.
• If you sell to VAT registered businesses, they can reclaim the VAT they pay you from HMRC, so it wont affect your selling price to other VAT registered businesses. However, it will affect the price your non VAT registered businesses and consumer customers pay.
• You will be able to recover the VAT on your own costs for goods and services purchased for your business.
• If you are in a VAT reclaim situation then you will definitely be better off (i.e. you pay more VAT than you charge).
• Voluntary registration can avoid you creeping over the VAT registration threshold and forget to become VAT registered. You could incur penalties from HMRC if this happens.
• You may be able to reclaim VAT on goods bought up to fours years before you registered for VAT, as long as your still using the goods, youve been trading throughout the period and you have VAT invoices and records as proof. You can claim for services up to six months before you registered for VAT.

The disadvantage of being VAT registered

There can be some disadvantages to being VAT registered, so if you have a choice as you havent hit the VAT threshold, then you need to consider these.

• Some of your clients and customers may not be VAT registered (which means they cannot reclaim the VAT on your invoice). This may make your products or services more expensive or unreasonably overpriced for them.
• You can face a VAT bill and you need to ensure you can pay it, if you generate more VAT from products and services that you sell compared to the VAT that you have paid on products and services purchased from other companies.
• VAT-registered companies have to maintain clear records particularly all VAT invoices and receipts and must file a quarterly VAT return. This can add to your own time or the time and costs of your accountant.

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

The simple answer is no, if you are not VAT registered, you cant claim back any VAT on goods or services purchased for business use .

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

If you have decided that becoming VAT registered is the right thing for you and your business, or you will hit or have the VAT threshold, you will need to register with HMRC.

Most sole traders can register for VAT online. By registering for VAT, you will be given a Government Gateway account. This account will be used for submitting quarterly VAT returns to HMRC.

Once everything is approved, your VAT registration certificate should be submitted to your VAT online account within 30 working days and youll be issued with a VAT registration number to use on your sales invoices and correspondence. Youll also be told the submission deadline for your first VAT return.

Here at dns accountants we offer a comprehensive VAT registration and VAT return service.

Submitting VAT returns as a sole trader

You will need to submit VAT returns to HMRC so they know how much you need to pay or how much they should refund you.

• If you’ve charged more VAT than you’ve paid, you will have to then pay the difference to HMRC.
• If you’ve paid more than you charged, you’re able to claim this back from HMRC.

VAT rates

There are three different rates of VAT and it’s up to you to make sure you’re charging the right amount appropriate to whatever you’re selling.

VAT Standard rate

The standard rate for VAT is 20% and this applies to most goods and services sold.

VAT Reduced rate

Some goods, such as children’s car seats or domestic energy, fall into the reduced VAT rate category. If what youre selling falls into these categories, then you’ll charge VAT at a rate of 5%.

VAT Zero-rate

Some goods like food, books, and clothing for children have a zero percent VAT rate on them.

You will still have to record zero rated items in your VAT accounts, and submit them to HMRC in your VAT Return.

What do you need to do to charge VAT as a sole trader?

Once you know which VAT rates apply to your business and the goods or services you sell, you need to begin to charge VAT on your invoices to customers. It is wise to add VAT to your existing prices (and notify your customers in advance youll be doing so).

You must show your VAT registration number on your invoices to your customers and on your VAT Return to HMRC.

VAT for sole traders with more than one business

If you’re a sole trader, there is no legal separation between you and your business (unlike limited companies). So, if you have multiple sole trader businesses, VAT will apply to all of your business income. Its important to remember this as this could affect the point at which you need to apply for VAT registration and legally register for VAT.

If you want more information about registering for VAT as a sole trader or any other VAT advice, then contact our team on 03330 886 686 or e-mail us enquiry@dnsaccountants.co.uk.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.