Whether you need to pay VAT as a sole trader depends entirely on how much money your business is turning over – basically, if at the end of any month, your annual turnover exceeds £85,000 in the previous 12 months you are required to register for VAT.
You can voluntarily register for VAT if the turnover is less than the threshold.
The question of being a sole trader or limited company is a matter of fact. If your trade as a sole trader (for example A. Smith or Arthur Smith) the VAT registration will be in that name.
If you have formed a limited company (Arthur Smith Limited) the VAT registration will be in that name.
Three VAT Public Notices which offer relevant advice are:
- Notice 700 – VAT General Guide
- Notice 700/1 – Should I be registered for VAT?
- Notice 700/15 – The ins and outs of VAT
- These can be located here
The VAT advice line will help with queries on 0845 010 9000
The relevant form is an Application for Registration – VAT 1
You can download these from the internet here
If you have any doubts you should talk to your accountant who will explain the requirements in greater detail and help with specific queries or even complete the VAT return on your behalf.
Once registered you will be given a unique VAT number relevant to only your business. It will be provided on a VAT registration certificate which will also have the details on the dates you will need submit your first VAT Return by, and your effective date of registration – the date when you started to pay VAT.
VAT Rates as a Sole trader
There are three different levels of VAT:
- Standard rate – currently 20%, this applies to the majority of goods and services
- Reduced rate – currently 5%, this applies to a very select set of goods and services
- Zero rated goods and services
You can find the full list of VAT ratings and exemptions here: Vat rates on different goods and services – gov.uk site
(NB – There are also VAT exempt items, for which you cannot claim back input VAT on expenses used to produce the zero rated good. No, we don’t fully understand either. The best explanation we have found is from the Help With HMRC website here.)
Charging VAT on goods and services sold to customers
You will be required to charge the VAT element on your sales invoices, so that for example if your invoice value is £1,000 you will add £200 and the customer is required to pay you £1,200.
Every quarter you will complete a VAT return showing how much you have collected in VAT (all the £200s in the above example, called Output Tax) and how much VAT you have paid to your suppliers (called Input Tax) and you will be required to pay the difference, assuming that that the Output Tax exceeds the Input Tax.