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Contents

  1. 1. Can a sole trader be VAT registered?
  2. 2. How does VAT work?
  3. 3. Benefits of being VAT registered
  4. 4. How to become a VAT registered sole trader
  5. 5. MTD for VAT

Can a sole trader be VAT registered?

August 12, 2022
If you’re looking to step into self-employment swiftly, you’ll likely start out as a sole trader. Not only is this one of the easiest ways to get your new small business off the ground, but as your own boss you’ll be calling all the shots when it comes to how you run your business.

As the main decision maker, you might wonder if you need to register your business for Value Added Tax (VAT) as your business gets more established.

If you’re earning above the VAT threshold you’ll need to register for VAT, irrespective of your business structure. However, if your annual turnover isn't there yet but you think your business may benefit from voluntary registration, read on.We’ll be covering when sole traders need to register for VAT, how to register and the benefits that come with owning a VAT registered business.

Can a sole trader be VAT registered?

If your annual turnover in the last 12-month period exceeds £85,000, or you expect to surpass this amount in the next 30 days, you’ll need to register your sole trader business for VAT.
As the VAT registration threshold for the 2022/23 tax year is set at this amount, any sole trader business earning above the threshold is legally required to register their business for VAT. With this in mind, if you're a sole trader with a taxable turnover above £85,000, you'll need to start paying VAT on your income.

Until the end of the 2023/24 tax year, the government has frozen the VAT threshold at £85,000, but this can change. You can find VAT thresholds for previous years at GOV.UK.

How does VAT work?

The majority of purchases you’ve made would have charged you VAT and, until now, you’ve probably never given it a second thought. However, as a VAT registered business owner, your relationship with VAT will be slightly different.
VAT, or Value Added Tax, is a consumer tax paid on goods and services at every stage of the production line.

This tax is charged on any good or service that can be classified as ‘taxable supplies’ and can include any of the following:
    Business sales of goods or servicesHiring or loaning goodsSelling business assetsCommissionItems sold to staff, e.g. canteen mealsBusiness goods used for personal reasons‘Non-sales’, such as bartering, part-exchange and gifts
If you purchase an item from a VAT registered manufacturer or supplier, you’ll pay VAT on top of the baseline cost, and if VAT registered yourself, will charge your customers VAT on the items you sell.In this chain, the tax you pay your supplier is referred to as input tax, whereas the tax you charge customers is output tax. Taking both of these into consideration, you can work out exactly how much VAT you owe HMRC.
Diagram showing how input VAT and output VAT work
Unless you’re on a specific payment scheme, such as the Flat Rate Scheme, you’ll need to file a VAT Return to HMRC every 3 months that totals both your output VAT and input VAT. For more on exactly how to pay, check out our ultimate guide to paying your VAT bill.

How much VAT do I need to pay?

The amount of VAT you’ll need to apply to the items you sell depends on the VAT rate attributed to them. There are 3 different rates of VAT in the UK: standard rate, reduced rate and zero-rate.

Rate%Applicable to
Standard20%Most goods and services
Reduced5%Children's car seats, maternity and sanitary products, fuel and power for domestic use, energy-saving materials installed for domestic use
Zero0%Books and newspapers, children's clothes and shoes, motorcycle helmets
These rates are accurate at the time of writing, but keep in mind that the rates can change at any time and you’ll need to start charging the updated VAT rates you charge from the day they change.
If you sell items that are either VAT exempt or out of scope, you’ll still need to record these items in your general business accounts, but won’t need to include them in your taxable turnover for VAT purposes. If you only sell VAT exempt or out of scope items, you won’t need to register for VAT.

For a full breakdown on where you can and can’t charge VAT, and how much to charge, head over to our guide to VAT rates.

You can work out how much VAT you’ll need to charge your customers with our VAT calculator, or with Ember, we’ll automatically apply these changes for you, giving you one less thing to worry about.

Benefits of being VAT registered

If you opt to voluntarily register your business for VAT, you’ll be able to reap the following benefits:
    You may appear more established as the current VAT threshold for compulsory registration is a taxable turnover of £85,000. Since potential clients won’t know whether you registered voluntarily or not, they’ll likely assume you’re earning above the threshold and, under the guise of being more established, will be more inclined to work with you. VAT registered clients can reclaim the VAT you charge from HMRC, so your prices stay competitive. Keeping more up-to-date and accurate records is an essential part of VAT registration, which can provide more details business insights. You can reclaim VAT on certain items purchased prior to the date you registered. For specifics on how far back you can claim, book a call with one of our accountants.

How to become a VAT registered sole trader

If you need to register your sole trader business for VAT, you can register for VAT online by creating Government Gateway account. You’ll need this online account to submit your VAT Returns, or can use a third party — such as Ember — to file your VAT Returns directly to HMRC for you.

There are a few where you’ll need to register by post using a VAT1 form, for instance if:
    You want to apply for a ‘registration exception’You’re joining the Agricultural Flat Rate SchemeYou’re registering the divisions or business units or a body corporate under separate VAT numbers
To become a VAT registered sole trader, you'll need the following information close to hand:
Once you’ve registered your business for VAT, HMRC will send a VAT registration certificate confirming your registration, which will contain the following information:
    A 9-digit VAT registration number which you’ll need to include on all invoices you raise Information about when to submit your first VAT return and payment Confirmation of your registration date, or your ‘effective date of registration’
This information will either be sent to your online VAT or to your address by post, depending on how you registered.

MTD for VAT

As of 1st April 2022, now all VAT registered business owners must register for Making Tax Digital for VAT.

Beforehand, only business owners who were earning above the VAT threshold needed to register, but with the latest legislation update you’ll now need to sign up for MTD for VAT, regardless of your taxable turnover. Under MTD for VAT, you’ll need to store all your VAT records digitally and file your tax returns using HMRC-approved MTD-compatible bridging or accounting software.
If you’re not sure where to start, you can check out our guide to finding the right VAT Return online software for your business — but to save you from scrolling, we can confirm that Ember is MTD for VAT approved.

Rachel Cameron-Potter
Rachel Cameron-PotterContent Marketer

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