Sole traders and VAT as a UK business

As a sole trader, whether or not you have to pay Value Added Tax (VAT) depends on how much money your business makes. Basically, you need to sign up for VAT if you made more than £85,000 in sales in the 12 months before the end of any given month.

You can also sign up for VAT on your own, even if your sales are below the threshold. Some sole traders choose to do this so they can get the VAT back on goods and services they bought for their business or so they don’t get fined if they go over the threshold by accident.

Below, we talk about how to sign up for VAT as a sole trader, how much you need to pay, VAT rates, charging customers VAT, and Making Tax Digital (MTD) for VAT.

Registering for VAT as a sole trader

With HMRC, you can sign up for VAT online. Once your business is approved, you should get a unique VAT number within 30 days. This number is only for your business.

It will be on a VAT registration certificate, which will also tell you when you need to file your first VAT Return and the date you were officially registered (the date when you started to pay VAT).

Whether you use your own name or the name of your business, your VAT registration will be under that name.

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, such as children’s car seats and home energy
Zero rate – 0%, 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 – There are also VAT exempt items, for which you cannot claim back input VAT on expenses used to produce the zero rated good. You can find a comprehensive explanation of this here: Help With HMRC)

Charging VAT on goods and services sold to customers

You will be required to charge the VAT element on your sales invoices. For example, if your invoice value is £1,000, you’ll add £200 (20%) to the total price of the product or service and the customer will pay you £1,200.

Every quarter you’ll 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

Making Tax Digital for VAT is a set of rules that all VAT-registered businesses, no matter how much money they make, have had to follow since April 2022. Making Tax Digital is part of the government’s plan to completely digitise the UK tax system.

To be in compliance, you’ll need to use software that has been approved by HMRC to keep digital VAT records and send in 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 700/15 – 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 and you can download it all here.

If you have any questions, you should talk to your accountant. They will explain the requirements in more detail, help with specific questions, and can even fill out your VAT return for you.