In article 5.7 of the Value Added Tax Act 1994, there are four basic points that show what VAT-registered traders are entitled to do in the event of being a non-VAT registered trader.
1) They may charge VAT on any goods or services they provide and keep all revenue from such trading activity as well as paying their input tax to HMRC.
2) They may recover all the input output tax incurred in carrying out their business activities and may keep a proportionate amount of this back from output tax due to be paid (at a reduced rate).
3) They may elect not to recover any input VAT incurred but instead pay an increased output VAT charge on all sales made (i.e. meaning the VAT rate is effectively increased to the standard rate of 20% or 17.5%)
4) They may recover VAT incurred as input tax and pay output VAT at the increased rate, but without carrying out any steps in point 2 above.
The article further clarifies that this applies regardless of whether or not the trader is registered for VAT under normal rules.. A trader registered for VAT may also have to pay a “deemed output tax” as extra output tax if they are established in a non-VAT area and provide goods or services directly to a customer outside of that area.