Understanding VAT as a Sole Trader
As a sole trader, the need to pay Value Added Tax (VAT) is determined by your business turnover. If your annual turnover exceeds £90,000 in the previous 12 months, you are required to register for VAT. However, you can also choose to voluntarily register for VAT even if your turnover is below the threshold. This can allow you to claim back VAT on business expenses and avoid penalties for accidentally surpassing the threshold.
How to Register for VAT as a Sole Trader
To register for VAT as a sole trader, you can easily do so online through HMRC. Once approved, you will receive a unique VAT number specific to your business within 30 days. This number will be stated on your VAT registration certificate, along with important dates for submitting your first VAT return and your effective date of registration.
Your VAT registration will be under the name you trade as, whether it’s your own name or your business name.
Understanding VAT Rates
There are three main VAT rates:
- Standard rate: Currently at 20%, this applies to most goods and services.
- Reduced rate: Currently at 5%, this applies to specific goods and services like children’s car seats and home energy.
- Zero rate: 0%, applicable to items like most food and children’s clothing.
It’s important to familiarize yourself with the full list of VAT rates and exemptions to ensure compliance.
Charging VAT to Customers
As a sole trader, you are required to charge VAT on your sales invoices. This means adding the VAT amount to the total price of your product or service. You will then need to track the VAT you’ve collected from customers (Output VAT) and the VAT you’ve paid to suppliers (Input VAT) on a quarterly basis.
If your Output VAT exceeds Input VAT, you’ll need to pay the difference to HMRC. Conversely, if Input VAT exceeds Output VAT, you can claim back the difference.
Making Tax Digital for VAT
All VAT-registered businesses, regardless of turnover, are now mandated to comply with Making Tax Digital for VAT. This initiative requires using HMRC-approved software to maintain digital VAT records and submit quarterly VAT returns.
For further guidance, refer to the three VAT Public Notices: Notice 700, Notice 700/1, and Notice 700/22. You can also contact the VAT advice line for assistance.
Tracking Profits with Accounting Software
Utilizing accounting software can streamline your VAT compliance and overall business management. Here are some recommended providers:
Sage: Offers expense management tools and pricing starting at £1.10 per employee per month.
Xero: Allows for on-the-go expense tracking and cash flow forecasting, with pricing from £1.60 per month.
Quickbooks: Connects bank accounts for automatic transaction matching and tax category creation, with pricing starting at £1 per month + VAT.
Explore these options to find the best fit for your business needs.
Conclusion
Understanding and managing VAT as a sole trader is essential for financial compliance and business success. By registering for VAT, charging customers correctly, and utilizing accounting software, you can navigate VAT requirements effectively as a sole trader.