VAT (value added tax) is a tax on some goods and services. As a consumer it’s often something we overlook because the tax is somewhat hidden in the cost of the item. As a business owner though, VAT is something that should constantly be kept under consideration.
It is compulsory for some businesses to register for VAT whereas others may wish to do this voluntarily. In this article we will be exploring VAT for businesses but in particular VAT as a sole trader.
Do I Need To Register For VAT As A Sole Trader?
- The businesses VAT taxable turnover exceeds £85,000 in the trailing 12 months then you will need to register for VAT within 30 days of the end of the month that the threshold was exceeded
- The business VAT taxable turnover is expected to exceed the £85,000 threshold within the next 30 days – You also need to register for VAT in this case and must do so by the end of that 30 day period.
VAT Taxable Turnover
Voluntary Registration for VAT As A Sole Trader
A business can also choose to register for VAT voluntarily even when it’s turnover is below the £85,000 threshold. Of course there is no deadline if this is the case.
But why would any business want the additional responsibility that a VAT registration brings? You can read about the benefits in our article Top 4 benefits of VAT registration but most of the time it’s because many businesses will actually profit from a VAT registration. Once a business is registered for VAT it is able to reclaim input VAT (VAT on purchases) which means those purchases cost the business less.
In that case why doesn’t every business register for VAT? As well as the additional costs and responsibilities involved in a VAT registration the main reason we don’t see all businesses registered for VAT is because of the impact it can have on sales. As well as being able to reclaim input VAT, the business also needs to charge and pay output VAT. This involves charging VAT on taxable sales.
The end result is that customers now have to pay more for the same goods or service and it can make the business less competitive.
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Examples
If you are considering registering your business for VAT voluntarily we would recommend getting in touch and speaking to an accountant first who will confirm if this is the right choice for your business. The following examples may help you to understand where a voluntary registration may be beneficial and where it wouldn’t:
Business 1 – A plumber who provides various services to individual homeowners. Total turnover is £50,000 in the trailing 12 months.
There is no requirement for business 1 to register for VAT as the turnover is below the threshold. The business could register voluntarily which would allow it to reclaim input VAT but it would also be required to charge VAT to the end consumer. This will result in the customers having to pay 20% more in the future and would make the business less competitive. In this situation a voluntary registration would be unlikely.
Business 2 – A freelance IT contractor who works numerous small jobs for various large multi national corporations and also has a turnover of £50,000 in the trailing 12 months.
Again there is no requirement for business 2 to register for VAT as the threshold has not been met. In this example the business may want to consider registering voluntarily as they will be able to reclaim input VAT on vatable expenses. Of course the business will need to charge VAT to it’s clients moving forward but as the clients are all large multi nationals it is likely that they will be VAT registered as well and would be able to reclaim that VAT under their own registration. In this situation a voluntary registration is likely to be of benefit.
Collecting VAT As A Sole Trader
If your business does register for VAT then it becomes a tax collector on behalf of HMRC. This involves charging VAT at the correct rate on any taxable goods and services that are sold. The business will then be able to reclaim VAT on any taxable goods or services that are purchased.
Your business would need to maintain accurate records of VAT transactions before reporting them to HMRC and paying any liability across. The reporting is usually done on a quarterly basis by submitting a VAT return.
The VAT Certificate
A VAT certificate is issued to all VAT registered businesses detailing a VAT registration number, business name and an effective date of registration. The certificate acts as proof that the business is permitted to collect VAT on behalf of HMRC.
The effective date of registration that shows on the certificate will depend on the reason for registration:
- Exceeding the VAT threshold over the past 12 months will result in the effective date being the first day of the second month after you go over the threshold
- Expecting to exceed the threshold in the next 30 days will result in an effective date of the date you realised the threshold would be exceeded
VAT Rates
There are 3 main rates of VAT that a business may need to apply to sales depending on what they are selling:
- Standard rate 20% – applies to most goods and services
- Reduced rate 5% – applies to some goods and services like child’s car seats and home energy
- Zero rate 0% – applies to some goods and services such as most food items and children’s clothes
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Adam Hill
Practice based accountant with over 10 years experience, specialising in SME's, Freelancers and Personal Tax. "I take pride in proactively recognising tax planning opportunities on behalf of clients to help them operate more efficiently."
