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

Updated on July 20, 2022

Self-employment

VAT is a challenging tax to avoid large penalty.” A self-employed person may have to deal with a variety of challenges when it comes to taxation. You should keep in mind that this is an abbreviated version of the article.

VAT registration is not required for all self-employed firms. Value-added tax (VAT) and whether or not your firm has to become VAT-registered are covered on this page.

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.

Traders in the United Kingdom whose sales (turnover) above the VAT threshold are required by law to register for VAT and to collect and remit VAT. The government’s tax collection agency, HM Revenue & Customs (HMRC), receives the VAT the trader charges.

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?

The value-added tax (VAT) is now set at 20%. Children’s clothing is taxed at 0%, while gas and electricity are taxed at a reduced rate of 5% for the home’s fuel supply.

When the coronavirus pandemic was very severe, some firms had their VAT rates reduced. The interim termination date was lifted on March 31, 2022. For more information, please visit GOV.UK.

Are all sales liable to VAT?

They’re not, in fact. Unless they choose to register freely (see “When do I have to start charging VAT to my clients” below), certain entrepreneurs cannot charge VAT on their sales because their enterprises’ turnover (sales) is below the VAT registration level. In addition, some commercial operations are exempt from the application of VAT.

If you’d like further information, visit GOV.UK.

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

As long as you aren’t an out-of-country visitor, it isn’t possible for you to claim VAT back.

For VAT-registered businesses, the VAT your suppliers charge will typically be deducted from the VAT you charge your consumers.

This is done each and every time a VAT return is submitted.

You must submit your VAT return and the net amount of VAT to HMRC in order to make a payment.

When you complete your VAT return, HMRC should compensate you if you paid your suppliers more VAT than you charged your customers.

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

As soon as your business is VAT-registered, you must begin collecting sales tax (VAT).

Mandatory and voluntary registration may both have this effect.

A decision must be made as to whether or not your firm is required to register for VAT when it exceeds the threshold (this is compulsory registration).

VAT registration is a two-part process for taxpayers.

Counting sales at the end of each month is essential.

You’ll have to keep track of your VAT taxable turnover over the previous 12 months, which means you’ll need a 12-month running total. The taxable turnover and sales will be the same for most businesses.

You must have taxable income of at least £85,000 for a 12-month period ending in 2022/23 to be eligible for VAT registration.
The deadline to register for VAT is September 30th, 2022, if your VAT taxable revenue for the year ending August 31st, 2022, reaches £85,000 Starting on October 1, 2022, all of your sales will require you to collect VAT.

Regardless of whether your VAT taxable turnover surpasses the registration threshold solely during a 12-month accounting period, you must register for VAT.

As soon as you think your VAT taxable turnover will surpass the VAT registration threshold (£85,000 in 2022/23), you must register.
Once you’ve registered for VAT, you’ll need to include the correct VAT % on your sales invoices and complete VAT reports.

Even though your sales volume does not necessitate registering for VAT, you can do so if you so choose. VOLUNTARY REGISTRATION is the term for this process. If you register to collect VAT on purchases that exceed your sales requirements, you may be able to recoup any VAT overpayments you made. Read our most recent article, “Are you considering voluntary VAT registration?” to learn about voluntary registration for self-employment with small salaries.

You may get further information on VAT registration at GOV.UK.

Businesses must make a decision on whether or not to comply with the ‘Making Tax Digital for VAT’ standards when they take effect on April 1, 2022. Making Tax Digital is mandatory unless you are excluded from it for VAT.

As a result, you’ll have to apply for exemption from Making Tax Digital for VAT in addition to registering to pay VAT.

What paperwork do I need to keep on hand for VAT purposes? The answer to the question, “What records do I need to keep for VAT?”

Currently, the processes for registering to pay VAT and for becoming a member of Making Tax Digital are distinct, but this will soon change. The Making Tax Digital for VAT sign-up process is not possible until you get your VAT number.

How do I register for VAT?

Most businesses may register for VAT online. If you don’t, you’ll need to fill out VAT1. GOV.UK provides 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?

VAT returns must typically be submitted on a quarterly basis.

They must be submitted and paid for within one month and seven days of the conclusion of the relevant term.

On August 7th, 2022, all VAT returns for the three months that ended on June 30th, 2022 must be submitted. On September 30, December 31, and March 31, 2023, additional VAT returns must be filed.

Most VAT returns are now required to be filed electronically under HMRC’s ‘Making Tax Digital’ system.

Here, you may learn more about Making Tax Digital for VAT. Visit this page for further information on how to accurately file your VAT return.

People with disabilities or who reside in rural or remote areas may not be able to electronically file their VAT taxes.

Your taxes should be ready for submission if that is the case. An answer from HMRC is needed. Getting in touch with HMRC is the best course of action for this.

You can find out more about the various VAT schemes available to you and other options on GOV.UK in this section.

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

Depending on your industry and annual sales, you may be able to use a simplified VAT system.

An overview of the most prevalent self-employed business VAT schemes is provided in the following table, along with links to more information. GOV.UK’s Different ways to account for VAT has more VAT schemes that are not listed here.

Flat rate

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.
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?

Tax evasion is punishable by a wide range of penalties, including fines and imprisonment. Additional information can be found on GOV.UK.

January 1, 2023, will mark the beginning of a massive revamp of the criminal justice system. There will be more information about the new system on this page soon.

What records do I need to keep for VAT?

To be on the safe side, you should generally hold on to all documentation related to your VAT return for a period of six years at the very least. GOV.UK has comprehensive information on what you must maintain and for how long.

The introduction of the Making Tax Digital for VAT regime in April 2019 resulted in some adjustments to VAT record keeping standards.

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?

If you no longer have a business, you must terminate your VAT registration (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).

If you fail to cancel your VAT registration within 30 days after closing your business, you may face a fine. To advise HMRC of your VAT registration status, use Form VAT7, which can be found on GOV.UK.

VAT deregistration is available to anyone who expects their taxable turnover to fall below £83,000 in the next year.

Additionally, HMRC’s deregistration manual offers more detailed instructions on how to end your registration and submit your final VAT return than GOV.UK.

You must keep all of your VAT records for a minimum of six years after your registration has expired.

Where can I get further information on VAT generally?

On GOV.UK, you may find all of this information, such as deadlines for VAT filing and payment, refunds, VAT inspections, and partnership arrangements.

GOV.UK gives access to HMRC webinars and e-learning packages if you want to learn more about VAT.