Whether or not you need to pay Value Added Tax (VAT) as a sole trader depends entirely on your taxable turnover. Basically, if at the end of any month your taxable turnover for the last 12 months goes over £90,000, or you expect it to go over £90,000 in the next 30 days, you need to register for VAT. You must do so within 30 days of the end of the month you went over.
You can also voluntarily register for VAT even if your turnover is under the threshold. Some sole traders choose to do this so that they can claim back the VAT on goods and services purchased for their business or to avoid financial penalties from accidentally going over the threshold.
Below, we explain how to register for VAT as a sole trader, how much you need to pay, VAT rates, charging VAT to customers, and MTD for VAT.
Registering for VAT as a sole trader
You can register for VAT online with HMRC. Once approved, you should receive a unique VAT number relevant only to your business within a few weeks.
It will be provided on a VAT registration certificate, which will also have details of the dates you need to submit your first VAT Return by, and your effective date of registration (the date when you started to pay VAT).
Your VAT registration will be under whatever name you choose to trade as, whether that’s your own name or the name of your business.
You can also apply to cancel your VAT registration if your taxable turnover falls below £88,000. If you don’t cancel within 30 days of becoming ineligible, you could face a penalty. Find out more about cancelling your VAT registration on gov.uk.
VAT rates as a sole trader
There are three different levels of VAT:
Standard rate – currently 20 per cent, this applies to the majority of goods and services
Reduced rate – currently 5 per cent, this applies to a very select set of goods and services, such as children’s car seats and home energy
Zero rate – 0 per cent, 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 – Zero-rated supplies are taxable at 0%, and you can usually reclaim input VAT related to making those supplies (subject to the normal rules). Exempt supplies are not taxable, and you generally cannot reclaim input VAT that relates to making exempt supplies.)
Charging VAT on goods and services sold to customers
You are required to charge the VAT element on your sales invoices. For example, if your invoice value is £1,000, you add £200 (20 per cent) to the total price of the product or service, and the customer will pay you £1,200.
Every quarter, you should complete a VAT return showing how much you have collected in VAT from customers (Output VAT) and how much VAT you have paid to your suppliers (Input VAT).
If the Output VAT exceeds the Input VAT, you’ll pay the difference to HMRC. However, if the Input VAT exceeds the Output VAT, you’re able to claim back the difference amount from HMRC.
MTD for VAT
All VAT-registered businesses, regardless of turnover, should now be signed up for Making Tax Digital for VAT. Every business will be signed up automatically unless they apply for a VAT exemption. Making Tax Digital is part of the government’s initiative to make the UK tax system fully digital.
To comply, you have to use HMRC-approved software to maintain digital VAT records and submit your quarterly VAT returns.
Three VAT Public Notices which offer relevant advice are:
Notice 700 – VAT General Guide
Notice 700/1 – Should I be registered for VAT?
Notice 700/22 – Making Tax Digital for VAT
These can be located here
The VAT advice line will help with queries on 0300 200 3700.
The relevant form is an Application for Registration – VAT 1, and you can download it all here.
If you have any doubts, you should talk to your accountant, who can explain the requirements in greater detail and can help with specific queries or even complete the VAT return on your behalf.
How to easily track your profits?
Accounting software can help you comply with Making Tax Digital for VAT – and generally make it easier to manage your business cashflow and profits.
There’s a range of providers to choose from. We’ve rounded up three of the best below.
Compare providers now to find the perfect option for your business.
Sage’s solution allows you and your team to manage expenses 24/7 from its intuitive mobile app and submit VAT returns directly to HMRC. All plans now come with Copilot, an AI productivity assistant.
Price: £0 for three months, then £18 per month.
Track expenses on-the-go with the Xero app, including automatic receipt capture and mileage tracking with a built-in GPS. Everything is fed into your ledger and cash flow forecast so you can create reports and surface insights.
Price: 30-day free trial. Then 80p per month for six months. Regular price is £16.
With Quickbooks AI-powered bank feeds, you can connect your bank accounts to automatically match transaction data to your bills and receipts. The app can also create tax categories and track your mileage.
Price: £10.80 for your first year if you pay annually (then £108 per year)
Moss allows you to issue corporate cards that make expenses submissions and reimbursements, as well as approvals and payouts a breeze. All expense data is automatically categorised and pre-coded.
Price: On request
Tide accounting is available as an add-on to your Tide business account. You can use it to auto-categorise and capture receipts, put money aside in a dedicated tax account, and file returns to HMRC.
Price: From £13.99 per month
Connect your card or bank account to Freshbooks to start capturing, categorising and tracking all your expenses. The software is MTD compliant and can handle multi-currency expenses.
Price: From £8 per month for first three months (then £16 per month)
With Zoho’s auto scan feature, you can track and categorise receipts and then link them to the associated transaction. Zoho also allows you to create profiles for any regular expenses.
Price: Free for sole traders and microbusinesses, then from £10
Further reading
The best accounting software for small businesses – It’s never been easier or more affordable to manage your tax and accounting using small business accounting software – find the best accounting package for your needs
How to manage your accounts as a small business – Everything you need to know about preparing your financials in the early stages of business
Tax advantages of a limited company versus sole trader – Haydn Rogan explains the tax advantages and disadvantages of status as a limited company and as a sole trader
9 accounting software platforms for Making Tax Digital – Here, Mariah Tompkins scrutinises accounting software options that small businesses can use for their digital tax returns
