How to become VAT-registered as a sole trader
One of the simplest methods to start a new business is to become a sole trader. You will have complete control over your operations, allowing you to make quick and easy decisions on how to operate your company.
One of those considerations will have to do with VAT (Value Added Tax) (VAT). You must decide whether or not your self-employed business requires VAT registration. It is a significant decision that will have an impact on both your customers and your business.
What does it mean to be VAT registered?
In the United Kingdom, VAT is a consumption tax levied on the value of goods and services.
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What is the VAT rate for a sole trader?
The usual VAT rate on most goods and services is 19% at the time of writing.
Some items, such as children’s car seats and home electricity, are charged at a discounted rate of 5%. Some items and services, like as food and children’s clothing, are zero-rated, meaning they don’t have to pay any VAT.
You will be legally responsible for calculating and charging VAT to your customers as a VAT-registered single trader. VAT returns must be used to report and transfer this VAT to HM Revenue and Customs (HMRC).
How can I register for VAT?
You’ll need to register with HMRC if you’ve decided that being VAT registered is the best option for you and your company.
The vast majority of sole traders will be able to register for VAT on the internet. You’ll get a new VAT online account (also known as a Government Gateway account) after you register for VAT. This account will be used to send HMRC your quarterly VAT returns.
Instead, three types of enterprises must register for VAT via mail:
- Businesses from throughout the European Union are ‘distance selling’ to the United Kingdom (registering with a VAT1A form)
- Importers of goods from an EU nation worth more than £85,000 (registering with a VAT1B form)
- Businesses who are selling assets that have received reimbursements under the 8th or 13th Directives (registering with a VAT1C form)
Within 30 working days of receiving approval, you should submit your formal VAT registration certificate to your VAT online account.
Choosing a VAT accounting method is a big decision.
You now have a basic understanding of how to register for VAT. However, you’ll be required to choose an accounting for VAT scheme during the procedure. HMRC uses the accounting scheme to determine whether you owe VAT or are eligible for a refund.
- Standard VAT accounting is required for most businesses: you must record the VAT collected on each sale and the VAT paid on each purchase, then submit a VAT return to HMRC every quarter.
- It’s possible that you’ll be able to employ annual VAT accounting: Some businesses can only file a VAT return once a year, but they must still pay quarterly. Those quarterly payments are calculated using your most recent return, or an estimate of it.
- You might be able to enrol in a flat-rate plan: Smaller firms may be able to avoid entire VAT accounting and instead pay a percentage of their turnover as VAT. An accountant or bookkeeper can assist you in determining whether this is appropriate for your company.
- You might be able to utilise the following cash accounting method: When money changes hands, you’re deemed to have collected or paid VAT under cash basis accounting. You’re presumed to have collected or paid VAT under all other schemes as soon as an invoice is raised.
The advantages of VAT registration
There are numerous advantages to voluntarily registering for VAT as a sole trader – even if you earn less than the VAT threshold – as a business owner:
Keep an eye out for financial penalties if you go over the VAT registration level.
It’s not uncommon for sole traders to slip past the VAT registration barrier without registering for VAT. The last thing you need is a letter from HMRC threatening you with a financial penalty for failing to register for VAT. By voluntarily registering for VAT, you may avoid the worry of missing the turnover threshold and focus on what you do best.
Improve your company’s image as a serious outfit.
Being VAT registered might assist cement your brand as a larger going concern if you’re a developing business that’s working hard to compete with other well-established enterprises in your market. You will be given a VAT registration number, which you may use to improve your image by displaying on your website, marketing brochures, and stationery.
VAT on goods and services purchased for your business can be claimed back.
You can reclaim VAT on all goods and services purchased for your business as soon as your company is VAT-registered. VAT refunds have been known to be received by sole traders who sell zero-rated products and purchase standard-rated things to assist run their businesses.
VAT can be reclaimed on items purchased up to four years after your registration date.
Even better, if you are still using the items, you may be able to recoup VAT paid on them as far back as four years. Your company must have been open for business during this time, with VAT invoices and records to prove it. You have only six months to make a claim for services.
I’m not VAT registered, thus can I claim VAT back?
You must be a VAT-registered sole trader to claim VAT back. You can’t claim VAT back on items or services you buy for your business if you don’t charge VAT to your customers. Even if you’re a VAT-registered sole business, you’ll need to keep records and legitimate VAT invoices in order to submit a valid VAT refund claim.
For sole traders, how does VAT work?
When I’m self-employed, do I have to charge VAT?
If you’re a self-employed professional who’s debating whether or not to charge VAT to consumers, you won’t have to worry about it until you’ve crossed the VAT registration level. This is an annual turnover benchmark. A sole trader must register for VAT with HMRC once their earnings exceed this amount.
For a sole trader, what is the VAT threshold?
As a sole business, you must register for VAT if your annual turnover exceeds £85,000 in the past 12 months or if you expect your revenue to exceed £85,000 in the next 30 days. You will receive a VAT registration certificate once you have registered for VAT, which will include your company’s unique VAT number as well as the due date for your first quarterly VAT report.
The new Making Tax Digital (MTD) for VAT system will apply to the majority of VAT-registered single traders earning more than £85,000 per year. This will necessitate the use of software compatible with HMRC systems to keep digital records of your VAT.
Remember, we can assist you in locating MTD-compliant software and will work with you to ensure that you are correctly handling your VAT data during this transition period. From 2021, sole traders earning less than £85,000 VAT will be affected by MTD, so now is a good time to get to know digital bookkeeping tools that can easily track your revenue and expenses.