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Sep 19 2023

Does a sole trader need to register for VAT?

Registering for Value Added Tax (VAT) is a decision most owners will be faced with at some point in the lifetime of their business. This requires that VAT apply to goods and services that the business provides, although only in certain circumstances. Do these same conditions apply to sole traders as a type of business? 

In this blog, we’ll discuss some of the basics around VAT registration and if it’s a requirement for sole traders in the UK. 


VAT registering explained 

Registering your business for VAT is a process whereby it is listed with the government as an active agent in sales and production. This means that you will have to charge the right amount of tax on any goods and services sold by the business. You will also be able to reclaim any VAT spent on company purchases. 

Although your business is the entity charging VAT to consumers, you won’t see any additional revenue. Instead, this tax is collected on behalf of HMRC and so gets transferred directly.  

The benefit of being registered for VAT comes from the ability to reclaim on business expenses. This applies to sales invoices and any items bought for operational purposes. If you aren’t registered, you will still have to pay VAT for business account purchases. Except now you don’t have the option of claiming anything back. 


How the UK defines sole traders 

The UK government defines a sole trader as anyone who runs their business as an individual and completes the work themselves. You’ll also be required to register as a sole trader if any of the following is true: 

  • Your self-employed earnings exceeded £1,000 between April 6th 2022 and April 5th 2023. 
  • You need to access claim tax-free childcare by providing proof that you’re self-employed. 
  • You’re seeking to make voluntary Class 2 National Insurance payments to support benefits qualifications. 

As a sole trader, you are then entitled to keep all your business profits (after tax). From here however, sole traders operate in a similar way to larger business models. They have a responsibility to: 

  • Keep business records and a comprehensive record of any expenses. 
  • Report and pay taxes to HMRC by sending a self-assessment tax return each year. 
  • Budget for and pay income tax on any profits, as well as class 2 and 4 National Insurance.


When to register for VAT 

UK businesses and organisations must register for VAT once their turnover reaches a certain threshold. This concerns the total value of relevant business acquisitions and taxable supplies. The threshold at the time of writing in 2023 is £85,000, where it will be fixed until 31st March 2024. Failure to register when you are required to do so will result in penalties. 

Any taxable individual (someone registered or required to be registered) whose supplies have gone over the threshold in the past 12 months is liable to register for VAT. It’s also a requirement if, at any time, the value of your taxable supplies is predicted to go over the registration threshold in the next 30 days. 

Liability also applies to businesses that make distance sales to Northern Ireland, or those based in Northern Ireland and making acquisitions. Although, it should be noted that the distance sale of excise goods in the UK can only be done by businesses that are registered for VAT. This must be done regardless of the value of the goods. 

Of course, there is the option to choose to voluntarily register for VAT. There are a few reasons you might want to do this. 

Pros of voluntary VAT registration 

For anyone starting out in business ownership or small businesses generally, voluntarily registering for VAT can: 

  • Save hassle down the line as, once the business exceeds the £85,000 turnover threshold, it will become necessary regardless. Registering for VAT while trying to pilot a growing business can be challenging. 
  • Reclaim a portion of VAT on any goods and services purchased by the business. 
  • Encourage the business to keep accurate and up-to-date records. This can make it easier for leaders to gain business insights and strategise more effectively. 

Cons of voluntary VAT registration 

Some aspects of VAT registration to be wary of include: 

  • Charging VAT typically means that the tax is included in prices. This leads the business’ products and services to appear more expensive to the end user than they are meant to be. 
  • Once a business is registered for VAT, it will be subject to certain housekeeping responsibilities. Among these are filing for VAT returns, keeping VAT invoice, receipts, and VAT accounting records. All of which can be a significant drain on time and resources, especially for SMEs. 

If you are still unsure if registering for VAT is the right move for your business, or if you want support in the process, it’s recommended to use the services of VAT specialist accountants. 


Registering for VAT as a sole trader 

The rules for sole trader VAT registration are largely similar to those for more traditional public and private limited companies. In other words, if you’re a sole trader that makes over the threshold of taxable supplies you will need to register for VAT. 

As mentioned above, there are certain benefits to being VAT registered that can make it an appealing option for sole traders. For example, selling to businesses that are themselves registered for VAT allows them to reclaim the VAT you charge, allowing your prices to remain competitive. 

On the other hand, you should weigh up whether giving your customers a higher price is worth it. It could test loyalties and cause some to stop buying. Typically, as sole traders tend to operate on a smaller scale than other companies, they will have the choice of whether or not to register for VAT. To help, an accountant for sole trader operations is often employed. 


Experienced VAT accountants  

If you choose to register for VAT as a sole trader, we’ll be there to support you. The biggest challenge when it comes to VAT registration is often figuring out if it’s the best decision from a business standpoint, and the process itself. Jan McDermott Chartered Accountants offer a range of services to businesses of all sizes. Our experienced team will be happy to help with any bookkeeping you require as part of VAT registration and more. Get started and contact us today.