Do I have to pay VAT if I am self-employed?

Updated on May 6, 2022

Self-employment

Taxes like VAT are difficult to understand and can result in severe fines. Here, you’ll learn about a variety of VAT-related concerns you can have if you’re self-employed. Please take note that this is only a brief summary.

Self-employed enterprises do not have to register for VAT if they do not have any employees. A VAT-registered trader must comply with certain requirements, which are described in detail on this page.

What is VAT?

Value-added tax (VAT) is the name given to this tax. This tax is levied by VAT-registered traders on the value of products or services sold to customers.

VAT registration and taxation on the supply of goods and services are legal requirements for UK businesses with sales (turnover) above the VAT level, as outlined below. As a result of charging VAT, the seller sends the money to HM Revenue and Customs (HMRC), the government’s tax-collecting agency.

If a trader’s sales fall below the VAT threshold, he or she does not need to register for VAT (but can if he or she chooses).

What rate is VAT charged at?

VAT is charged at a rate of 20%. Certain items, such as children’s clothing, are taxed at 0%, while home fuel, such as gas and electricity, is charged at a reduced rate of 5%.

The coronavirus epidemic took its toll on the hotel and tourism industries, which saw their VAT rates temporarily slashed. On March 31, 2022, the temporary reduction was lifted. Visit GOV.UK for further information.

Are all sales liable to VAT?

They’re not, in fact. The turnover (sales) requirement for VAT registration is lower for some businesses, so they aren’t required to charge VAT on their sales (unless they wish to register voluntarily see below for further information). It should be noted that VAT is not charged on all commercial activity. See GOV.UK’s ‘Get started’ section for further information.

I have been charged VAT on some of the items I have bought. Can I get it back?

Except if you’re an international tourist, you won’t be eligible for a VAT refund if you’re not registered for VAT.

If you’re a VAT-registered business, the VAT your suppliers charge you will be deducted from the VAT your customers pay you. Each time a VAT return is filed, this step is conducted. HMRC must be paid the net VAT amount reported on your VAT return. Depending on the amount of VAT paid to your suppliers, you may be eligible for a refund from HMRC when you file your VAT return.

When do I have to start charging VAT to my customers?

Once you become a VAT-registered trader, you must begin charging VAT on all of your sales. Both mandatory and voluntary registration can lead to this.

Whether or not you are legally required to register for VAT is a question that must be answered when your business’s income exceeds the VAT registration level (this is compulsory registration).

Compulsory VAT registration is subject to two separate tests:

The entire sales for the month must be tallied at the end of each month. You then need to keep a 12-month running total, which is the total amount of your VAT taxable turnover for that month and the preceding 11 months. The taxable turnover and sales for most businesses will be the same. In order to register for VAT, you must meet the registration barrier of £85,000 for a 12-month period ending in 2022/23.
Taxpayers who expect to make more than £85,000 from VAT in the year ending August 31, 2022 must register for VAT by 30 September of that year. From the 1st of October 2022 forward, you’ll be forced to collect VAT on all of your sales.

The registration threshold is not merely the amount of VAT taxable turnover over the course of a 12-month accounting period; you must register for VAT if your VAT taxable turnover exceeds it in ANY 12-month period.

At the beginning of any 30-day period, if you suspect that your VAT taxable turnover will surpass the VAT registration threshold (£85,000 for 2022/23), you must promptly register.
Once you’ve registered for VAT, you’ll need to include the proper percentage of VAT in your sales invoices and file VAT reports.

There is no requirement for you to register for VAT if your sales fall below a certain threshold. Voluntary registration is the term for this. If you know that the VAT you pay on your purchases will be greater than the VAT you must charge on your sales, then registering for VAT may be a good idea because you will be eligible for frequent VAT refunds. You may wish to read our news item, “Are you in low-paid self-employment and considering becoming VAT registered?” if you’re interested in voluntary registration.

More information about VAT registration can be found on GOV.UK.

Once the ‘Making Tax Digital for VAT’ rules come into effect on April 1, 2022, when you register for VAT, you must also consider if you need to comply with them. Make Tax Digital for VAT requires that you do this unless your business qualifies as exempt from the mandate. Because of this, you’ll also be required to apply for exemption from Making Tax Digital for VAT at the same time as registering to pay VAT. The following section, under “What records do I need to keep for VAT?” has more information on the records required when you are VAT registered.

Currently, registering for VAT and registering for Making Tax Digital for VAT are two separate processes, however it is expected that they will be integrated in the future. Until you have acquired your VAT number, you cannot join up for Making Tax Digital for VAT.

How do I register for VAT?

VAT registration can be done online for most firms. If you don’t, you’ll need to fill out VAT1. On GOV.UK, you can learn more about how to register for VAT in the United Kingdom.

When do I have to make VAT returns to HMRC and pay my VAT?

For the vast majority of firms, VAT returns must be submitted on a quarterly basis. In most cases, they must be submitted and paid for within one month and seven days of the end of the relevant period. A VAT return, for example, must be submitted by the 7th of August 2022 for the three months ending on 30 June 2022. From 30 September 2022 through 31 December 2022 through 31 March 2023, VAT returns must be filed every three months.

Most VAT returns are now required to be filed electronically under HMRC’s ‘Making Tax Digital’ system. See What Is Making Tax Digital For The VAT? for more information on how to file a VAT return in detail.

If you have a disability or live in a location where broadband is unstable, you may be eligible for an exemption from the requirement to file your VAT returns online. You should be able to file your tax returns even if you can’t. You should speak with someone at HMRC about this.

You may be able to utilise one of several different VAT schemes, all of which are briefly described in the part on GOV.UK titled “Different ways to account for VAT.”

Are there any simplified VAT schemes which may suit my business?

You may be allowed to adopt a simplified VAT scheme if your business has a certain sort of revenue and a certain amount of annual sales. The following table provides a brief overview of the most common VAT schemes used by self-employed enterprises, as well as links to additional information. Additional VAT schemes are available, which are described on GOV.UK under Different ways to account for VAT but are not included in the list below.

 

Scheme Eligibility Important points More information
Annual accounting Estimated VAT taxable turnover for next 12 months is £1.35 million or less. Submit one VAT return annually.

Make advanced VAT payments during the year.

Not suitable if you anticipate regular VAT repayments.

See GOV.UK.
Cash accounting Estimated VAT taxable turnover for next 12 months is £1.35 million or less. VAT is calculated on actual cash receipts and payments rather than based on invoice dates. See GOV.UK.
Flat rate Estimated VAT taxable turnover for next 12 months is £150,000 (excluding VAT) or less. Pay VAT based on a fixed percentage of your sales, the percentage used depends on the business sector and you may also have to consider the amount of business expenditure incurred on ‘relevant goods’.

Do not claim VAT back on purchases except certain capital assets costing over £2,000.

What happens if I pay my VAT late or submit my VAT return late?

VAT non-compliance is punishable by a wide range of penalties. GOV.UK has further information.

As of January 1, 2023, the penalty system has been revamped and new rules will take effect. This page will be updated soon with details about the new system.

What records do I need to keep for VAT?

As a general rule, you should maintain all of the paperwork related to your VAT return for at least six years. When it comes to keeping records, GOV.UK provides thorough instructions.

Making Tax Digital for VAT was implemented in April 2019 and brought with it several adjustments to VAT record keeping regulations. Keep part of your records in digital format if you have to follow the Making Tax Digital for VAT guidelines. The new regulations are explained in detail in our section on digital recordkeeping.

When do I no longer need to be VAT registered?

Your VAT registration must be cancelled when you cease business operations if your company is registered for VAT (unless you have sold your business as a going concern and the new owner has kept the same VAT registration number, but you should take professional advice in this situation). A penalty may be imposed if you fail to terminate your VAT registration within 30 days of ending your business. Form VAT7, which is available on GOV.UK, can be used to notify HMRC of your VAT registration status.

If you anticipate your VAT taxable turnover will fall below the deregistration level of £83,000 in the following 12 months, you can voluntarily cancel your VAT registration.

Deregistration can be found in HMRC’s Deregistration Manual, as well as GOV.UK, which provides information on cancelling your registration and submitting your final VAT report.

You must preserve your VAT records for six years after cancelling your VAT registration.

Where can I get further information on VAT generally?

VAT information may be found on GOV.UK, including information on deadlines for filing and payment, recovering VAT, VAT inspections, partnerships, and using VAT online services.

GOV.UK has a selection of webinars and e-learning tools provided by HMRC to assist you better understand VAT.

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