Of all the business-related responsibilities you have, irrespective of what type of self-employed you are, VAT is an inescapable obligation. Notably, the value-added tax, commonly known as VAT, impacts the self-employed more than the companies with extensive business since being self-employed means you do not need an in-house staff to get to grips with VAT responsibilities on your behalf. Therefore, it is of utmost importance that you comprehend how to register for VAT as a self-employed.
Accordingly, this blog is meant to provide you with all the fundamental knowledge on how to register for VAT as a self-employed so you can avoid non-compliance with HMRC.
Also, it might be your first time taking a solo ride as a self-employed. Therefore, before learning the basics of VAT registration, you must delve into learning the dynamics of self-employment, including its types and weigh its pros and cons.
In this connection, our following guides can help you a great deal:
Everything you must know about what is self-employment.
What are the advantages and disadvantages of being self-employed?
What are the types of self-employed in the UK?
How to Register for VAT as a Self-Employed?
Once you have gained a robust foothold in the marketplace as a self-employed, your earnings will likely grow proportionally. And that is where the vital step of VAT comes to the surface. Consequently, you will likely encounter the need to register for VAT at some point as well.
Also, VAT registration is not a process that gets done overnight. Instead, it is a lengthy and step-wise process that requires thorough deliberation. Hence, you must learn the following steps in order to fully grasp how to register for VAT as a self-employed in the UK:
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Understand VAT for Self-Employed:
According to HMRC, VAT (Value Added Tax) is a sales tax added to most products and services sold by VAT-registered traders or businesses in the UK.
Alternatively, VAT is a tax that VAT-registered traders levy when selling goods or services in the UK. This tax is applied at each stage of the supply chain, from production to sale, with businesses acting as collectors on behalf of HMRC.
Now, being VAT registered means that in line with the HMRC VAT requirements, a business must register for VAT if the value of its taxable supplies exceeds the current VAT threshold.
Conversely, even if a business’s turnover remains below the current threshold, it can still choose to register for VAT. It is called the voluntary VAT registration. Lastly, while registering for VAT is not mandatory unless your business reaches the registration limit, voluntary registration is recommended owing to the benefits it offers.
Learn the VAT Registration Threshold for Self-Employed?
Before we discuss the VAT registration limit, it is of utmost importance to dispel the prevalent misconception among sole traders that only limited companies or large firms are obliged to register for VAT. In truth, sole traders and limited companies are similar in the sense that both are liable for VAT registration.
Why?
Because VAT registration primarily depends on your 12-month turnover, not the business structure.
Now, the VAT threshold is paramount in understanding how to register for VAT as a self-employed. It is because this limit will determine your business’s eligibility for VAT registration.
It is the amount of your annual earnings or turnover that your business can generate before VAT registration becomes obligatory or the turnover becomes VAT-taxable. More specifically, the current VAT registration limit for the 2024-2025 tax year is £90,000.
Furthermore, businesses and individuals must register for VAT once their turnover crosses this amount or expect to exceed it within a 12-month period.
Beyond that, regardless of whether a self-employed individual has been running their business for one month or several years, they must register for VAT with HMRC when their turnover exceeds £90,000 at any point within the 12-month timeframe.
Consider VAT rates for 2024/25:
VAT is charged at specific rates depending on what products and services you are selling as a self-employed individual. Usually, there are three rates at which VAT is applied on the goods and services across the UK. For the tax year 2024/25, the following are the VAT rates:
Lastly, all VAT-registered businesses must maintain a record of all their sales and the VAT they charge, even if the goods or services are zero-rated.
Standard rate (20%):
This rate usually applies to most goods and services in the UK)
Reduced rate (5%):
The reduced rate is charged on certain goods and services, such as mobility aids, home energy, and children’s car seats.
Zero rate:
This is a 0% rate tax, wherein any items falling under this rate are VAT-exempt. It is reserved for essential items, such as food, children’s clothing, books, and certain public transport. It is worth emphasising that although the items under this category are free from VAT, the sales must be recorded on your VAT return.
Know the difference between input VAT and output VAT:
The difference between input and output VAT is considerable, for this difference is the tax that you pay to or reclaim from HMRC.
Further elaborating, the VAT bill or the VAT due is the difference between the VAT you charge customers for the goods or services and the VAT you pay for your business purchases.
Input VAT:
The invoices you receive or the VAT you pay on all your business-related purchases is called input VAT.
Output VAT:
On the contrary, the invoices you issue or the VAT you charge to consumers on things you sell is called output VAT.
Fortunately, while you can charge VAT on your sales, you can claim back VAT on your purchases if you have paid excess input VAT than what you have charged the customers.
Register for VAT via HMRC:
Fortunately, the VAT registration process is the same whether you are applying for voluntary or compulsory registration.
Generally, self-employed individuals most businesses and self-employed workers can easily register for VAT online via the HMRC website. They do so through the HMRC website and create what is known as a “Government Gateway Account”. Businesses can also appoint a third party, such as an accountant, to do this on their behalf.
Now, as a sole trader, you need to provide the following information to become a VAT-registered business:
- Your birth date.
- Your ID number, like passport or driving license.
- Your NI (National Insurance) number.
- Your business’s nature and turnover.
- Your bank account details.
- Your business’s relevant financial records, including the payslips or P60s
Next, you can log in or sign up to the government website online services page with your gateway account and apply for VAT registration:
Thereafter, you can go to the ‘Get another tax, duty, or scheme’ page and choose the ‘VAT’ option. By following the steps given in the portal, you can complete your VAT registration.
Further, following the completion of your online VAT registration, you will receive a VAT certificate from HMRC within 30 days via post. This certificate is essential since it contains your nine-digit VAT number and the confirmation of the date your business became VAT-registered.
Notably, this date is called the effective date of registration. The certificate also shows the details of when your first return is due. It is significant to remember that you must include the issued nine-digit VAT number on all your invoices.
Finally, once registered, you must charge your customers the appropriate VAT and pay what is owed to HMRC.
Complete the VAT returns process:
Once you have registered for VAT, it is time to complete and submit VAT returns. It is another major consideration when understanding how to register for VAT as a self-employed. Moreover, completing VAT returns is substantial to reflect your VAT-taxable turnover and VAT balance, such as the VAT charged on sales and paid on purchases.
Eventually, it will enable you to reclaim VAT on goods and services you purchased for the business.
Moving ahead, If it is your first time registering for VAT, HMRC will usually issue a date for your first VAT return.
VAT returns are usually submitted quarterly under HMRC VAT regulations, unlike the accounts that you submit annually. Subsequently, you are liable to submit four returns each year.
In addition, even if you do not charge or pay VAT in a three-month period, it is an obligation for self-employed individuals to submit a return.
Lastly, the deadline for submitting each VAT return is one month and seven days after the end of your three-month VAT period.
Maintain accurate VAT records:
To ensure your VAT returns are submitted correctly, it is crucial that you keep accurate records of all your VAT invoices and receipts. HMRC will calculate how much tax you must pay or how much you can reclaim on the basis of your records.
Final word:
Value Added Tax (VAT) is a key component of the UK’s tax system. If you are self-employed, with your business meeting certain criteria, registering for VAT becomes a legal requirement.
It is noteworthy that despite the fact that VAT registration is not mandatory until a specific threshold, choosing to register voluntarily can offer you certain benefits. Thus, it is prudent that you understand thoroughly how to register for VAT as a self-employed.
In addition, you can appoint a professional accountant for the purpose of seeking a customised consultation aligning with your business needs and future goals. Fortunately, the competent, skilled, and knowledgeable accountants listed on Accountingfirms can keep your VAT affairs in order.
Finally, while there is no requirement to appoint an accountant if you choose so, with the help of an accountant, you can ensure your VAT affairs are being dealt with accurately.
So, let’s begin to make your VAT journey a smooth sailing with Accountingfirms.
Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.