What is Self Employed VAT and How It Works?

Value-Added Tax (VAT) is an indirect tax applied to businesses all over the UK and Ireland. Contrary to what some people think, VAT is also applicable to self-employed businesses. Initially, these businesses don’t have to pay the tax.

However, once they reach the VAT threshold set by HMRC, they become eligible for self employed vat. Continue with this article if you want to know more about what VAT self-employed is, its eligibility criteria, and how it works.

Are Self-Employed Persons Eligible for VAT?

Self-employed persons are not hired by a particular business or employer that pays them a specified wage. Instead, they run their own businesses and are directly associated with the subsequent distribution channel member, i.e., a trader, customer, or other businesses.

Some notable examples of self-employed people include photographers, graphic designers, personal trainers, copywriters, tutors, social media managers, etc. Unlike what many people Think VAT is also obligatory for self-employed people.

Your self-employed business becomes eligible for VAT if it exceeds the HMRC’s threshold. Once entitled, you can charge VAT from your customers and reclaim the VAT you paid on your business purchases from HMRC.

What is Self Employed vat?

Value-Added Tax, informally known as VAT, is an indirect tax in the UK and Ireland applied to businesses with an annual turnover of over 85,000 euros. The VAT rate depends upon the type of products and services the business provides. As of 2024, the typical VAT rate ranges between 5% to 21%.

VAT is paid by each member of the distribution chain, including the customer. All members of this chain can reclaim their VAT except for the consumer. In other words, the manufacturer, retailer, and wholesaler only pay VAT temporarily while the end user pays the actual tax.

However, only businesses registered with HMRC can reclaim VAT. If your business is not HMRC-registered, you will pay taxes on your purchases but cannot reclaim it. VAT and its obligations are regulated by the HMRC (HM Revenue and Customs) department. Even the enrollment for VAT is done via the HMRC’s website. Thus, to get the latest updates related to VAT, you must stay in touch with HMRC.

What is the Self Employed vat Threshold?

In the UK and Ireland, vat threshold for self employed people are treated the same as other businesses. That is why their VAT threshold remains the same as others. When the threshold of a self-employed business exceeds 85,000 euros in a financial year, it becomes entitled to VAT.

The threshold for VAT keeps changing from time to time. However, for the fiscal year 2024, it has been set to 85,000 euros. Yet, even after exceeding this threshold, it is up to the businesses whether they want to register for VAT. Most businesses opt for VAT registration, as then they can apply for returns. Read about; if you don't know how to register for vat?.

How Much VAT Should You Charge As a Self Employed Businessman?

The VAT regulations for self-employed businessmen are almost identical to any trade and profession. The standard rate of 20% is maintained for VAT across typical products. If you pay 20% as VAT on your purchases, then you must charge the tax from the customers at the same rate. Similarly, by the end of the fiscal year, VAT returns will be redirected at the same rate

Though most products are categorized under the standard category, there are some items and services that are taxed at a lower rate. On the other hand, there is a zero-rate category in which essentials are made VAT-free. The following table aptly describes the VAT rate for different products.

How Does VAT Work for the Self Employed?

Contrary to what many people think, VAT has the same regulations for self-employed people as any other business. Self-employed cannot immediately apply for VAT after starting their business. Instead, they must wait for at least one financial/fiscal year before registering for VAT.

Another mandatory aspect is that the applying candidates must fulfill the self employed vat threshold quota. If their annual earnings exceed this threshold, they can only apply for VAT. Otherwise, they are VAT-ineligible, implying that they can neither do they have to pay VAT nor can they apply for VAT returns.

How to Register for a Self Employed vat?

The procedure of VAT registration for self-employed businesses, whether compulsory or voluntary, is the same. You can apply for VAT online by accessing the gateway account permitted by your government. The date you register for VAT is regarded as the “Effective Date of Registration.” Once successfully registered, this date will be considered the start of your financial year.

The VAT registration process can take up to four months. After registration, you will receive a VAT certificate via post at your registered address. If this registration process is too hassling for you, you can contact an accountant who will do the job for you for a nominal fee of 20 to 50 pounds.

What is VAT Invoicing for Self Employed Businesses?

One of the most crucial procedures in VAT is to record the fiscal year's invoices. You must record it whenever you pay VAT on a particular business purchase or charge your customer VAT. Otherwise, you won’t be able to apply for VAT returns, and legal issues may arise.

HMRC might impose heavy fines and penalties even for meager mistakes and minor negligence. Therefore, ensuring an adequately regulated recordkeeping process is crucial to acquiring the potential VAT benefits. The following are the key aspects that should be present in your invoices for efficient recordkeeping.

• VAT registration number
• Invoice number (different for every invoice)
• Description of services and goods
• Invoice date and day
• Business title and address (registered one)
• Customer name and address
• Date and day of supply (can be different or same as the invoice date)
• VAT rate and category
• Price of each item or service without VAT
• Price each item or service with VAT
• VAT is charged on each item or service
• Total amount without VAT
• Total amount with VAT
• Discounts and sales should be mentioned

What are the Benefits of VAT for Self Employed Businessmen?

Besides being a legal obligation, VAT has several benefits for self-employed businesses. Some of these advantages include the following;

• VAT Reclamation

  Even if your business is not registered with VAT, you can still pay VAT on items and services purchased from VAT-registered suppliers. Being a VAT non-compliant, you won’t be able to reclaim the paid VAT on your business purchases from HMRC.

  However, when VAT-registered, your business becomes eligible for VAT reclamation. All you must record the invoices and report your paid VAT on purchases to HMRC. If your charged VAT is less than the paid, you will get a total VAT return.

• Backdating VAT Returns

  Another notable benefit of VAT is that you can backdate your VAT returns. This means that after registration, you can also reclaim VAT on purchases made before the Effective Date of Registration.

  However, this backdating policy has a specific limit. In the UK and Ireland, the limit is of four years. This means a self-employed person in these two regions can reclaim paid VAT on purchases made during the past four years. Another thing that you must ensure is that you have supporting proof that can validate your VAT reclaim. Typically, this proof includes invoices or cash receipts on which the charged VAT rate and amount are explicitly mentioned.

• Exempt from Penalties

  After your business reaches a certain threshold, VAT registration becomes mandatory. If you don’t voluntarily register for it, HMRC imposes penalties, which increase with time. But if you voluntarily apply for VAT without reaching the threshold, you will save your business from fines and penalties.

  Also read about; Pros and Cons of Being VAT Registered

• Minimize Tax Evasion

  One of the most significant benefits of VAT is that it reduces tax evasion mechanisms. Since VAT requires recordkeeping, the businesses maintain a stricter control on their invoicing. As a result of this approach, the companies can maintain a better control on their transactions.