A quick guide to VAT when you’re self-employed

Updated on July 19, 2022

Lady stands next to clothes rail taking notes

To keep your books accurate and your cash flow going as a self-employed business owner, you need to know a lot about accounting.

Once you’ve reached a certain annual taxable revenue threshold, you’re required to collect Value-Added Tax (VAT).

Having a basic understanding of how VAT works makes it easier to deal with. Financial gains may outweigh the additional time and effort required.

VAT will be discussed in detail in this post. We’ll also go over how to register for VAT and charge and submit VAT as a self-employed person.

Table of contents

What is VAT, and how does it work for self-employed entrepreneurs?

Anyone who has ever purchased something is undoubtedly familiar with Value-Added Tax (VAT), or VAT.

A sales tax-like tax is imposed on the whole cost of a product or service. However, unlike sales tax, it is paid at each stage of the manufacturing, distribution, and sale of the item.

Customers of VAT-registered enterprises receive a bill and tax bill for every VAT taxable (or VATable) goods and services they purchase or sell. Regular VAT returns are then filed and either reclaimed (if what was paid is greater than what is being charged to customers) or owed to the government (if what was paid is less) (if the opposite is true).

The method of collecting and paying VAT may or may not apply to your self-employed business, depending on your taxable turnover and preferences. This is how it seems.

How is VAT paid?

When purchasing any taxable products or services, both the individual customer as well as the business are required to pay a sales tax.

It doesn’t matter if it’s raw materials for production or specialized services you require to keep your business running.

You will be obligated to charge VAT on your goods and services if you are registered for VAT or if you are eligible for VAT registration.

If your suppliers are VAT-registered, you will be responsible for paying their VAT as input.

If you’re VAT-registered, the tax you collect from customers is known as output VAT.

VAT is the difference between your outgoings and incomings when you have to pay it to HMRC.

The visual depiction of the relationship is shown in the following manner:

Do I need to register if I’m self-employed?

Individuals who work for themselves, such as freelancers, must comply with the same VAT registration requirements as businesses of any size. After registering for VAT and completing the necessary paperwork, your business can begin charging VAT for the first time.

There are several benefits to registering even if you aren’t legally required. An explanation of the process is provided below.

When and how to register

If a firm makes a certain amount of money, it must register with the VAT authorities in order to collect tax credits.

This applies even to businesses managed by self-employed individuals. In the UK, yearly sales of £85,000 or more are considered “significant.”

Following the threshold, you have 30 days from the end of the month to register for VAT. “Backward look” is a fitting term to describe this action.

Let’s say you sold more than £85,000 worth of goods or services since last October, and you received a payment on October 5th that put you over the threshold, making you eligible for a refund. Up to the end of the month, businesses can register for VAT.

If you reached that milestone on October 28th, you’re still eligible for this offer. Registration for VAT is due on November 30th.

If you expect your sales to exceed the minimal criterion, you must further register. This is referred to as taking a forward view.

If you believe your sales will surpass £85,000 before the end of the year, you have 30 days from the moment you discovered this to register. Getting this type of communication is more likely after a sale that will send you over the top when the payment is completed.

Registration is possible even if you haven’t met the minimum earnings requirement. Voluntary VAT registration offers both advantages and cons.

If you have registered for VAT and are above the threshold for VAT, your company will appear more legitimate to others.. If your suppliers charge you VAT and you want to reclaim it, you can use this tool.

This means that your costs may rise by 20% because you’ll have to start charging VAT. It’s possible that your customers and the businesses you provide with your items will be unhappy if you don’t set prices (if applicable). Over the course of the year, you’ll also have to deal with a lot more paperwork, which can consume both your time and resources.

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positive and negative aspects of desktop registration

In any case, registering is the same process.

You or your representative (or accountant) can submit an application for VAT registration on the GOV.UK website. There are two possible dates for “Effective Day of Registration”: “backwards look” or “ahead look” (EDR).

As soon as your company is formally registered, you can begin charging VAT to your own customers and remitting the money to HMRC.

Benefits of VAT registration when you’re self-employed

Being VAT-registered offers a wide variety of advantages. Even if a company hasn’t yet met the minimal revenue threshold, it can still register.

As a sole proprietor, here are several reasons why you might wish to consider it.

To begin with, VAT paid on commercial purchases can be recouped.
Despite the fact that you are exempt from VAT, some of your suppliers may still be charging it.

If you’ve registered for VAT, you can get that cost back on your VAT returns.

The amount of VAT paid and the amount of VAT charged are both included in tax returns.

Refunds can be issued to customers who paid less than you paid suppliers provided the difference is less than the amount you reclaimed when you returned an item to the supplier.

If you go over the VAT threshold, you won’t be hit with a fee.
If you’re not careful, you might have signed up for more than you planned.

HMRC will levy a fee if you fail to register for VAT by the due date. If you’re ready to breach the threshold, voluntary registration could save your organization from hefty fines.

That means your company’s reputation is enhanced.
In a competitive market, becoming VAT-registered may allow your firm to stand out by strengthening your company’s image. It is possible to establish the legitimacy and profitability of your business by putting in place a VAT registration number on your marketing materials and websites and charging VAT on your invoices. You will appear more credible if you show that you have a long history of success.

What happens if you charge VAT before you’ve been registered? Find out in our article on the penalties for late registration.

Charging VAT as a self-employed business owner

Make sure you use the correct VAT rate if you want to get some of your VAT back. You must always keep accurate records of the expenditures associated with the goods and services you provide.

This site has all the information you could ever want at your fingers at any given time.

How much should I charge for my time and expertise? That’s something I’m not sure of.
This is a list of goods and services that are exempt from VAT.. Keeping these items affordable for the bulk of the population is a goal of government policy. Financial services businesses such as insurance and investment corporations, as well as non-profit organizations, are all covered in this category.

Therefore, you must know how much VAT you should charge your customers for these products and services. Businesses in the UK can chose from three different VAT rates:

used is a common measure (20 percent ).

This is most of the time right. All non-exempt sales should be taxed at this rate, regardless of whether they qualify for a lower or zero tax rate.
Expenses are reduced (5 percent ). Only a few items and services, such as a child safety seat and home power, are eligible for this low price.
A loan’s interest rate can be 0%. (0 percent ).

There are numerous examples of this. Excluded from this category are meals at restaurants and the purchase of prescription drugs.

VAT credits may be available even if you don’t have to pay it on zero-rate purchases.
Per rate, here is a summary of the percentages that you charge Whether your company’s VAT rates and regulations are listed on GOV.UK, you should check to see if they are.

Products and services become more expensive because of taxes on products and services.

How much of the present interest rate gets to the general public?

Nearly half of the population is affected by this ailment.

A wide range of products and services can be found here.
There has been a 0.11% increase in performance.
This can be used in a variety of ways.
In the numeric scale, 0% is the equivalent percentage.
No taxes are levied on goods or services (e.g., most food and infant clothing)
How much VAT you must pay and collect is determined on the products you purchase and sell.

Some goods and services may not be subject to tariffs at all or only in specific conditions.

A detailed explanation of how to apply VAT rates is provided in our VAT exemption guide.

Invoicing with VAT

It is documented on the invoices that your suppliers provide you that you pay the VAT.

If you want to get VAT back, you’ll need to keep track of the tax you charge customers on your invoices.

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The necessity of accurate VAT documentation cannot be overstated.

Your VAT invoices will be penalized by HMRC for poor record-keeping, whether or not it was deliberate.

Three types of VAT invoices are available: simple, complete, and amended. Most prevalent is the full VAT invoice, which includes (in addition to what is contained on a basic invoice):

Tax Identification Number (TIN)
The price per unit of products and services that do not include VAT
VAT is not included in the total cost.
The total amount of VAT that was billed to customers
As an illustration, consider the following VAT invoice:

the typical vat bill
Top Tip: Check out our thorough guide to VAT invoices for more information on which VAT invoice type to use and what information should be included on each.

Reporting and paying VAT to HMRC

As a business owner, you must be aware of the dates and procedures for filing VAT returns so that you can both pay and claim VAT.

Here, you’ll learn how to submit returns, which VAT scheme you should choose, and how Making Tax Digital will affect your tax payments.

Submission of VAT returns is required.
The VAT you charge and collect must be tracked separately in a VAT account for tax purposes. Your tax returns will be accurate if you keep track of this throughout the year.

In order to file your taxes on time, you must keep correct and current VAT records. Despite your greatest efforts, mistakes can still be made. The most common VAT mistakes can be avoided and corrected by reading this article.

Filing a tax return: When and how
A VAT return is submitted to HMRC at the end of each accounting period.

Your quarterly period begins when you initially register for VAT.

Returns and payments are due one month and seven days after the end of each accounting period.

A return must be filed no later than the 7th of May if your accounting cycle concludes on March 31, for example.

If you owe HMRC money, you must pay them by this time. Prevent missing the deadline by filing your tax return and making the transfer as early as possible.

How and when should a tax return be submitted?
Most companies allow you to return items using your online account. A VAT online account can be created once you’ve registered with HMRC and got your VAT number. Check your due dates and file your returns from the site.

As part of your tax return, here are some of the facts you’ll need to include:

All of your third-quarter purchases and sales.
Taxes on goods and services that you are required to pay
What you can claim back in VAT on your purchases.
You will receive a refund from HMRC for the VAT you owe.
You should include VAT codes on your tax return that indicate the amount of VAT you charged and the type of product or service you sold. This is a good idea. To avoid costly mistakes, utilize our complete VAT codes guide to learn the entire list of frequently used codes and how to use them.

Different VAT schemes to choose from

Choosing a simpler VAT scheme may be an option for you if your business’s kind and yearly revenue allow it.

In order to assist small firms that might be harmed by the regular VAT scheme, HMRC created three different alternatives to it.

They give you a wider range of alternatives when it comes to paying and charging VAT to customers and other businesses. They also allow you to better control your yearly cash flow because of their pliability.

As a self-employed entrepreneur, you have a wide range of options to select from. GOV.UK has all the information you need on how to account for VAT.

Scheme Eligibility

Points to consider
For a fixed price
Less than £150,000 is your anticipated VAT turnover (excluding VAT).
Taxes are calculated based on a percentage of sales rather than the regular rate.
What you charge consumers is less what you pay HMRC, and the difference is all yours to keep.

Except for capital assets over $2,000, you cannot claim the VAT back on your purchases.

Accounts payable

Less than £1.35 million is estimated to be your VAT turnover year 2013.

Each sale is subject to the applicable sales tax.
When your consumers pay you, you don’t owe a cent. Furthermore, you can only claim VAT back once you’ve paid your vendors.

Accounting for the year

Less than £1.35 million is estimated to be your VAT turnover year 2013.

It’s possible to pay VAT in advance at any time of the year, as long as you only submit one VAT return per year.
You can either claim a refund or pay the difference between your total advance payments and your actual VAT bill when you file your return.

Each strategy has its advantages.
There is no need to keep track of the VAT you charge on each sale under a flat rate VAT arrangement. The simplest way to figure out how much VAT to pay is to divide your total business revenue in half.

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As you don’t pay until you’re paid, cash accounting helps you keep an eye on your finances.

Buying on credit, on the other hand, presents a challenge because you can only get the VAT back once you have paid off the obligation.

Smaller payments spread out over the year allow you to keep an eye on your financial flow.

However, if you want regular VAT payments, this may not be the best option for you.

How Making Tax Digital affects your return

As part of their “Making Tax Digital” (MTD) initiative, HMRC has recently made it mandatory for most businesses to submit their VAT returns online. Keeping digital records and submitting VAT returns online are both required for eligible businesses using software that is compatible with the new requirements.

GOV.UK’s search engine can help you find compatible bookkeeping and accounting software.

To use MTD, you’ll need to join up online after you’ve purchased the required software. Prior to the due date for your return, you must enroll.

In an effort to reduce human mistake in VAT and tax returns, Making Tax Digital has been implemented.

Check out our guide on what Making Tax Digital means for your small business to get a better understanding of the process.

Who is required to sign up?
MTD registration is necessary for all VAT-registered enterprises. Signing up by April 2022 for those who have volunteered is mandatory. Signing up is optional just for individuals who are not required to do so.

Who is exempt from this rule?

Exemptions from MTD are available to those who meet one of the three requirements listed below.

When it comes to keeping your business documents or submitting your VAT returns, digital technologies are not “reasonably feasible.” An age- or disability-related or geographical factor could account for this.
Insolvency proceedings have been initiated against you or your business.
Electronic communications and electronic records-keeping are prohibited by the religious beliefs of everyone in charge of your company.
Every application will be evaluated on a case-by-case basis by HMRC. To make an application, you must contact HMRC and explain why you believe you are exempt from paying the tax.

On GOV.The UK, you can find out if you’re already exempt or learn how to apply for the exemption.

How much VAT do I have to charge on products and services that I sell outside of the United Kingdom
It’s possible that your business in the UK may have to charge VAT on sales outside the country depending on what you offer, where your customers are from, and how much you’ve sold in total.

You don’t have to charge VAT on goods supplied to clients outside the UK or the EU, because these goods and services are normally zero-rated (though you must still report on it as zero-rated is not the same as exempt).

However, there are a few things to keep in mind when it comes to services.

The rules governing VAT on services sold to European Union countries
If you’re selling your services to other businesses, you’ll have to charge VAT. If the customer has a VAT number, you treat them as a business for VAT purposes in the UK. Even if they are a company, you must treat them as a non-business consumer if they do not have a VAT number.

What’s known as “place of supply” is also important in determining whether or not to charge VAT and how much.

According to the laws for charging VAT when selling tangible items, you must do so in the United Kingdom.

For non-business customers, the supply location is also the United Kingdom. There are exceptions, though, when you’re selling products or services to businesses. As a result, you must abide by the country’s VAT regulations.

GOV.The UK has a wealth of information about consumer types and supply locations.

Charge back
A reverse charge is used when the VAT belongs to a different country. In other words, you don’t charge VAT; instead, the consumer is responsible for deducting the appropriate amount from their order. To ensure that you have a clear record for your VAT return, you include the customer’s VAT number and a notation such as “Reverse charge applies” on your invoices.

Visit GOV.The UK for more information on the reverse charge.

Wrapping up

Maintaining sound financial standing as a sole proprietor necessitates familiarizing yourself with your VAT obligations and benefits.

VAT returns are complicated, but with careful planning and regular record-keeping, you may easily handle the paperwork needed.

You’ll save time and money by using software to keep track of your VAT data.

You can save time and hassle by automatically inputting income and expenditures, and you can rest assured that the figures are accurate. Sync your HMRC-compatible software with a free business bank account.