I'm a VAT professional with years of experience helping businesses with compliance and reporting. My goal is to simplify VAT calculation and provide valuable insights through my engaging writing style and clear explanations of complex concepts.
Small-scale businesses like sole traders get exempted from heavy taxation and other legalities, which are pretty standard in the corporate sector. However, being a sole trader in the UK does not spare you from VAT. Despite your company's unincorporated status in the industry, you will still be obliged to pay a specified VAT amount.
Navigating the VAT as a sole trader can be quite complex. You don’t have your in-house accounts and finance team to guide you through all these legal procedures. Although external help from public accountants may guide you generally, they would never be able to understand the intricacies of your business.
Thus, you must take things into your own hands and scrutinize the VAT process for your company yourself. If the VAT concept is new to you and you are confused regarding which step comes first, then you are at the right place.
The following guide comprehensively guides entrepreneurs who want to register for VAT as a sole trader. By the end of the guide, you will not only be familiar with the VAT legalities for sole proprietorship but will also be able to register and manage VAT for your business.
A sole trader is a kind of business structure in which one person owns and runs the overall business. In this business model, there is no legal difference between the owner and his business. A sole trader makes all the decisions regarding his business, making him entitled to all the profits and losses.
Therefore, as a sole trader, your assets are at stake in case of losses or business debts, but you have a right to all profits after tax deductions. Unlike the common perception that there are no employees in this business model, there is only one owner, but you may have additional employees as a sole trader.
The HMRC has individually specified the VAT charges for different products and services. For instance, a sole trader's VAT charges will differ from a partnered business or a corporation. Moreover, your business turnover will also determine whether you are eligible for VAT.
Similarly, the VAT for sole traders also depends upon the types of services you proffer or products you sell. The VAT charges keep transitioning from time to time. Until 2021, 5 to 12.5% VAT was charged on almost all products and services.
But due to inflation, HMRC had to raise the VAT charges. As of 2023, the VAT charges for most products and services are 20%. However, this 20% VAT is only applicable to standard-rated products.
VAT-discounted products are charged only 5% tax. Whereas zero-rated products and services do not have VAT inclusion. HMRC exempts zero-rated from any tax; thus, they are not eligible for VAT.
First, you need to determine whether your business is eligible for VAT. Your business turnover will decide if you should register for VAT. VAT registration becomes mandatory if the fiscal year or operating cycle turnover exceeds 85,000 euros. This specified amount is designated as the sole trader’s VAT threshold.
If the business turnover is higher than the threshold amount, you must register for VAT. Otherwise, VAT is not obligated for the products or services you offer.
At the end of the fiscal year, determine your turnover rate. You can submit a registration application on the HMRC website if the amount exceeds the VAT threshold. Moreover, if you think your turnover will surpass the threshold by the fiscal period's end, you can apply for VAT even between the month. In order to register for vat, here is the complete guide about How to register for VAT.
Since there can be so many products and types of services and do sole traders pay VAT charges for each of them individually? The HMRC has categorized these products and services into three branches to simplify the answer to this query. These include the following;
The previous section has briefly explained what zero-rated products are. Now let’s scrutinize it extensively. Doing so will help you to estimate whether you should include VAT charges in your services.
Goods and materials that constitute a component of a broader supply chain are exempted from tax. Zero-rated products are widely utilized as raw materials and are primarily involved in manufacturing other goods. Therefore, zero-rated items are designated as tax-free to reduce the overall expenditure of the final good.
For instance, coffee beans are zero-rated products. People don’t consume coffee beans directly. Instead, they brew it to make iced or hot coffee. Similarly, there are tons of other products that are tax-free, implying that they have 0% VAT.
As their name suggests, the standard-rated products include the general VAT charges. They don’t have any exemptions or leniency.
Earlier, there used to be a 12.5% VAT on standard-rated products. But since 2022, the VAT charges have been increased. Currently, standard-rated goods are charged a whopping 20% VAT.
Most items used in our daily life are standard-rated. These include furniture, clothing, fine dining, consultancy services, and auto vehicles.
The next category we have is products and services with reduced VAT rates. The standard-rated products are charged 20% VAT. Whereas products with a reduced rating have lower VAT charges.
The reduced VAT rates were revised in November 2020, and the previous guidelines were dismissed. According to the current VAT policy, the VAT charges for reduced-rated products is only 5%.
The reduced VAT rate applies to cleaning services, photographic supplies, short-term hiring, or a supply of horses. Moreover, antique items and certain fuel types also fall under this category.
The last step is to determine the pricing of your products and services. VAT affects the overall pricing of your products and, thus, can impact your profits. You cannot sell products or provide services at the same rate that you were proffering before VAT registration.
Therefore, once you are done with VAT registration, you should revise your product’s pricing. Doing so will secure the profit margin for your business and ensure a positive turnover at the end of the fiscal period.
Value Added Tax or VAT is a tax levied by Ireland in case you supply services and goods as a sole trader. Sole traders are required to register for VAT if, in a trading period of 12 months, their turnover is greater or likely to be greater than the VAT threshold. The VAT threshold in the case of the supply of goods is €75,000 and is €37,500 for the supply of services.
Once a sole trader is registered on VAT, the business is required to implement VAT on the sale of its goods and services. The standard rate for VAT is 23%; however, it can be decreased to 13.5%, 9%, 4.8%, and 0%, depending upon the different goods and services.
Not many people know, but registering for VAT as a sole trader comes with multiple perks. Some of its most notable benefits are;
Companies associated with legal authorities are more reputable in the business sector. Registering for VAT can transform your small-scale business into a well-known brand. Moreover, association with VAT gives validation to the customers regarding the business. Thus, if you want to enhance your business image, then registering for VAT can play a pivotal role.
The biggest perk of being registered for VAT is that you can reclaim the taxes for your business expenses. The raw materials used to make your business goods must have incurred you VAT. You can get that additional VAT back from HMRC if you have registered for VAT.
On a small scale, it may seem like a minimal advantage. But when buying raw materials in bulk, this VAT can accumulate to a huge amount. Reclaiming this amount would make a big difference for your business and positively impact your finances.
Not many people know, but you can actually reclaim the VAT of your business expenses incurred during the past four years. The condition is that your business should remain operational throughout the period, and you must have a clean track record with HMRC.
If you oblige both of these conditions, you can easily reclaim the VAT by submitting the VAT invoices for the past years. However, if your business provides services instead of goods, then you can only reclaim the VAT for the previous six months.
If you own a B2B company, registering for VAT can significantly improve your status in the industry. In the UK, VAT-registered companies mostly buy from those sellers who are also registered with HMRC. Doing so helps VAT-registered companies to reclaim their business expenses from HMRC. Therefore, if you want to improve your business spectrum, registering for VAT becomes a compulsion.
The VAT threshold is an intricate amount limit, which most people might forget sometimes. Many businesses accidentally exceed this threshold limit without registering for VAT.
As a result, they have to face penalties by the HMRC, which are accompanied by heavy fines. However, if you voluntarily apply for VAT before surpassing the threshold, you can easily avoid this penalty.
Why do Some Businesses Voluntarily Apply for VAT?
Multiple businesses have turnover below the VAT threshold but still choose to register for VAT. Why do they do so? What is the advantage of being a VAT-registered sole trader? Why are they willing to increase their product prices when they are not even eligible for it?
These sole traders actually do so to avail the advantages of VAT. If they are not associated with HMRC, they won’t be able to reclaim the VAT on their business expenditure. This implies they will have to purchase the raw materials for their goods at market rates.
When businesses cannot reclaim VAT on their purchases, their profit significantly reduces. Moreover, businesses also opt for VAT to enhance their public image. It shields companies from legal insecurities and helps boost their reputation in the business sector.
One of the most significant perks of registering for VAT is that you can reclaim your business expenses as a sole trader and increase your company’s profit margin.
There are numerous benefits of registering for VAT as a sole trader. Doing so can help increase turnover and boost the company's image in the B2B sector.
Registering with VAT as a sole trader comes with numerous perks. You can build your brand image and uplift your repute among the customers. However, the biggest benefit registering with VAT provides is that you reclaim the VAT you have paid on your business expenses.
Sole traders pay tax rate 20% and 5% VAT on standard-rated and reduced products respectively. While VAT is not applicable on zero-rated products, implying they are tax-free.