5 – VAT – a kind of sales tax
Last Updated on 5 April 2024
Value Added Tax is a tax on the sale of goods and services. It kicks in when the seller is VAT registered, depending on the item being sold. This applies to sole traders too.
A VAT-registered business is effectively a tax collector working for HMRC.
The standard rate is 20%. (Some items attract a lower rate of VAT. Some are exempt.)
You have to register for VAT if your turnover (as opposed to profit) is more than £90,000 in any twelve month period. (This figure usually changes every year on 1st April.)
You can usually register voluntarily if your turnover is lower than the compulsory threshold.
You can de-register again if your turnover across a year goes below £88,000.
Digital reporting
Importantly, any VAT-registered business (including sole traders) has to report VAT information using special software as of April 2022. They will have to register for the ‘Making Tax Digital for VAT’ service via gov.uk.
For more about software and other Making Tax Digital issues, please see our ‘Record Keeping and MTD’ help sheet.
Registration for VAT is simple and free, though in recent years it’s been taking a few months for VAT numbers to be issued. Voluntary registration is normally approved when you get your first income, even if you apply earlier.
Advantages:
- Kudos and credibility – you look like a proper business
- You can claim some VAT on capital items (kit and hardware) bought up to four years BEFORE you registered (and up to six months for services you’ve bought).
- VAT can be re-claimed on business expenses and equipment once registered, including motor expenses (at various rates)
- There is a simplified VAT system which might work for some small businesses
(See help sheet 6: Flat Rate Scheme for Small Businesses)
Disadvantages
- You’ll be more expensive to people who are not registered for VAT (as they won’t be able to claim your VAT element back from HMRC). Not a problem if you’re supplying to VAT-registered businesses, who simply claim back the VAT that you are charging them.
- Penalties for late payment
- Some additional book-keeping – though nothing terrifying if you’re organised, and if you issue small numbers of invoices and have low expenses. Using MTD software has helped with this.
- VAT returns are due every 3 months using special Making Tax Digital software (see help sheet 4).
- Annual accounting also possible (though quarterly is a good discipline)
Find out more:
www.gov.uk/business-tax/vat
www.gov.uk/guidance/rates-of-vat-on-different-goods-and-services
www.gov.uk/vat-registration/purchases-made-before-registration
HMRC National Advice Service: 0300 200 3700
gov.uk – VAT and selling outside the UK
gov.uk – Guide to VAT and digital services in EU
gov.uk – Making Tax Digital for VAT from April 2022 for all!
Federation of Small Businesses – VAT guide (2024) >
Posted on 27 January 2020