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

Updated on May 16, 2022

Self-employment

The penalty for failing to pay VAT are severe. As a self-employed individual, you may encounter a number of VAT-related concerns. We address some of these concerns on this page. Please take note that this is only a brief summary.

VAT registration is not required for all self-employed firms. On this page, you will learn about VAT and when you may be required to register as a VAT-registered business.

Illustration of the letters VAT with people standing and sitting around

What is VAT?

VAT stands for Value Added Tax. This tax is levied by VAT-registered businesses on the value of products or services sold to their consumers.

VAT registration and taxation on supplies of goods and services are requirements under UK law, as outlined below. VAT is collected by the government’s tax collection agency, HM Revenue & Customs (HMRC).

As a result, only some merchants are compelled to be VAT-registered: those with sales below the VAT level are exempt from doing so (though they are free to do so).

What rate is VAT charged at?

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

Some businesses that were particularly hard struck by the coronavirus pandemic had their VAT rates temporarily decreased. On March 31, 2022, the temporary reduction was lifted. See GOV.UK for additional information.

Are all sales liable to VAT?

They’re not, in fact. The turnover (sales) level for VAT registration is lower for some enterprises, so they aren’t required to charge VAT on their sales (unless they wish to register voluntarily – see below for further information). In addition, there are several business operations that are exempt from VAT. For more information, see the ‘Get started’ section on GOV.UK.

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

In order to reclaim VAT if you are not VAT registered, you must be a visitor from another country.

A dealer that is registered for VAT can usually deduct the VAT they pay their suppliers from the VAT they charge their consumers. Each time a VAT return is filed, this step is conducted. HMRC must be paid the net VAT amount reported on your VAT return. If you paid more VAT to your suppliers than you charged your consumers, HMRC should reimburse you for the difference 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. Compulsory or voluntary registration can lead to this outcome.

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.
You must register for VAT by 30 September 2022 if your VAT taxable turnover exceeds £85,000 for the twelve months ending 31 August 2022. From October 1st, 2022, you will be obligated to charge VAT on all of your sales.

You should keep in mind that you must register for VAT if your VAT taxable turnover exceeds the registration limit at ANY TIME over a 12-month period that is continuous – not only during your 12-month accounting period.

For any 30-day period in which you believe your VAT taxable turnover will surpass the VAT registration threshold (£85,000 for 2022/23), you must register immediately.
Following registration for VAT, you must include VAT to your sales invoices and file VAT returns.

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. As a result of registering for VAT, you’ll have the ability to reclaim any VAT overpayments on your transactions that you’ve already paid, which may be more than you’ve charged in sales taxes. To learn more about voluntary registration for low-paid self-employment, have a look at our recent news story, Are you considering voluntary VAT registration?

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

VAT registrations must include a decision on whether or not to comply with the ‘Making Tax Digital for VAT’ standards beginning on April 1, 2022. In order to avoid this, you must comply with Making Tax Digital for VAT. Therefore, you must either request for an exemption from Making Tax Digital for VAT or begin keeping digital records as soon as possible when registering for VAT. The following section, under “What records do I need to keep for VAT?” has more information on the records required if you are a VAT registered business.

Currently, registering for VAT and signing up for Making Tax Digital for VAT are two different processes, however it is expected that they will be integrated in the future. You cannot enrol in Making Tax Digital for VAT until you have your VAT number.

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 form VAT1. GOV.UK has information on how to register for VAT in the United Kingdom.

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

The vast majority of companies are required to submit VAT returns on a quarterly basis. A month and a half after the end of the applicable period, they must be completed and submitted, together with payment. VAT returns must be submitted by August 7th, 2022, for example, for the three months ending June 30th, 2020. Additional VAT returns will be required up to the end of September 2022, December 2022, and so on.

Most VAT returns are now required to be filed electronically under HMRC’s ‘Making Tax Digital’ system. See What is Making Tax Digital for VAT? for further information. For more information on how to file VAT returns, go here.

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. If this is the case, HMRC should come up with a workaround so that you can file your taxes. HM Revenue and Customs should be contacted.

It is possible that you may be eligible for one or more of the various VAT schemes described below or in the section Different ways to account for VAT on GOV.uk.

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. In the table below, you’ll find a quick explanation of the most common self-employed VAT schemes, as well as links to additional resources. This section does not include all of the VAT options available; see GOV.UK’s Different ways to account for VAT for more information.

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.

See GOV.UK.

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

Non-compliance with the VAT system carries a heavy price tag. GOV.UK has further information.

On the first of the year 2023, a new set of penalties will go into force. We’ll be adding more details about the new system soon, so check back.

What records do I need to keep for VAT?

Usually you should keep all the information relating to your VAT return, such as business invoices and receipts, for at least six years. Check out GOV.UK for further information on what you need to keep and how long.

Some changes relating to the record keeping requirements for VAT came into effect in April 2019 when the Making Tax Digital for VAT regime was introduced. This means that you will need to retain at least some of your documents digitally if you are required to comply with the Making Tax Digital for VAT requirements See our digital recordkeeping section for further information.

When do I no longer need to be VAT registered?

Your VAT registration must be cancelled if your business is no longer in operation (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). To avoid a penalty, you must terminate your VAT registration within 30 days after ceasing to conduct business. Form VAT7 is available on GOV.UK, or you can notify HMRC online.

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.

Information about cancelling your registration and submitting your final VAT return may be found on GOV.UK, while HMRC’s deregistration manual provides additional details.

It is required that you preserve your VAT records for six years after you cancel your VAT registration.

Where can I get further information on VAT generally?

For example, GOV.UK provides information about VAT filing and payment dates, refunds, VAT inspections and partnerships, all of which may be found here.

On GOV.UK, you may find a range of HMRC webinars and e-learning tools designed to help you better understand VAT.

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