VAT as a Sole Trader: What to Know

As a sole trader, managing your tax obligations can be especially tricky. You don’t have the support of an in-house finance team, and it’s hard to navigate all those complex regulations on your own. VAT (value added tax) is a particularly complex issue. On the one hand, there are clear circumstances in which the sole trader is obliged to register for VAT. At the same time, there are circumstances in which you may choose to be VAT registered, even if you are not obligated to do so. This guide will help you make more informed VAT decisions.

When am I obliged to register for VAT as a sole trader business?

So, does a limited company need to be VAT registered? Generally speaking, your business is legally required to register for VAT when its taxable turnover exceeds the threshold set by local tax authorities. Sole traders as a business are no exception and are subject to the same VAT registration threshold as a business of any other kind. 

For example, if your annual turnover exceeds £85,000 per year, in the UK, you need to register for VAT with HMRC - even operating as a sole trader. Each country has its own threshold, but the basic principle is the same. (Obviously, in countries that do not have VAT - such as the United States - there is no VAT threshold and no corresponding duty to register for VAT.)

Do sole traders need to charge VAT?

When does a self employment business or sole trader need to charge VAT? Essentially, the rules are the same for any business including that of a sole trader. Once sole traders are registered for VAT, they are required to charge VAT on most goods and services. (A limited number of goods and services are zero-rated and thus not subject to VAT, even if the provider is VAT registered). 

While only VAT registered taxable persons can and need to charge VAT, they are also the only entities that can reclaim VAT. Once registered, the sole trader can recover all the VAT incurred in the ordinary course of business.

When submitting a VAT return, a registered VAT business operating as a sole trader is able to claim the amount equivalent to input VAT (VAT paid on your business expenses) in excess of the output VAT (VAT you charged on invoices). In other words, if their business pays more VAT than it collects, it can recover the difference.  

How does VAT work when for a sole trader?

Once registered for VAT, a self employment business are obliged to charge VAT and submit regular, accurate VAT returns to the local tax authority.

As many self employed people manage their business and accounting administration on their own, the bureaucracy of managing VAT can be daunting. After all, there’s the risk of serious penalties and Vat surcharge rates for submitting an incorrect income tax and value added tax return, or submitting an erroneous tax return, even if the errors are not intentional - a risk you don't want to take as a sole trader.

Given the complexities of VAT compliance, sole traders may be satisfied simply to meet their VAT obligations. More advanced VAT strategies, such as maximizing VAT reclaim opportunities, may seem beyond the scope and capability of a sole proprietor.

While such concerns are understandable, neglecting to recover all available VAT greatly increases the cost of their business. Fortunately, cutting-edge VAT compliance technology and expert VAT support are now available to any business, including sole traders. These opportunities mean that even self employed traders can take advantage of the most advanced VAT strategies and optimize their VAT compliance.

Advantages and disadvantages of registering for VAT as a sole trader

We’ve considered the conditions under which a sole trader is obliged to register for VAT. But what if your turnover is below the VAT threshold? Can you still register?

The short answer is yes. Legally, a sole proprietor is entitled to register for VAT even if its annual turnover does not meet the VAT threshold. However, choosing whether or not to do so is a more complex business decision for sole traders.

Considerations for sole traders when choosing to register for VAT

The following are two important considerations for the sole trader business to bear in mind:

First, the additional administrative requirements of registering for VAT. As a VAT registered entity, a sole trader is responsible to account for VAT, keep comprehensive records, manage all the invoicing and supporting documentation and submit regular, accurate VAT returns.

Second, once VAT registered, a sole trader is obliged to charge VAT on their supplies at the specified local rate. If a sole trader is mainly supplying goods or services to other businesses, charging VAT may not affect demand, as VAT registered businesses can generally recover the VAT. 

However, if your customers are mainly private individuals, then a sole trader may have reason to be wary of registering, thus being obliged to charge VAT. 

Benefits of registering for VAT as a sole trader

With the above complications in mind, there are still reasons why your business should consider registering for VAT, even if it is not obliged to as a sole trader. Principally, VAT registration enables you to reclaim VAT on your business expenses. That’s important because even as a sole trader that is non-VAT registered, you are likely to incur VAT simply by acquiring goods and services from VAT-registered businesses. 

In such cases, deciding whether or not the benefits of a sole trader registering for VAT outweigh the disadvantages is, therefore, a business decision rather than a legal or regulatory issue. It’s not a decision that can be decided generally, as each business's operations are different.  

For sole traders, who often do not have specialized training in tax and finance, it can be beneficial to consult with a VAT expert for a customized assessment. 

Can sole traders benefit from VAT technology?

Many large corporations have come to rely on VAT technology to make their VAT compliance and recovery much more efficient. With thousands of invoices to manage, often across multiple divisions, it’s obvious why big companies need to use automated VAT solutions.  

By contrast, self employed business operators and sole traders may not always appreciate the need for automation. However, accuracy and efficiency are just as, if not more important, for individuals. After all, how many sole traders have time (or expertise) to deal with the hassle of missing invoices or letters of demand from tax authorities of the business?

VAT compliance technology makes it easier to collate all supporting documentation and ensures your VAT return is accurate as a sole trader. And with the support of VAT recovery experts, you can maximize the VAT you reclaim, lowering the overall cost of a business. 

Through the assistance of a VAT expert, a sole trader is also able to optimize your VAT recovery, enhancing cash flow. For the sole trader or small business, this liquidity relief is often especially helpful. 

Even self employed and sole trader entrepreneurs don’t need to go it alone

If you anticipate that your taxable turnover will soon exceed the relevant local VAT threshold, you should start preparing to meet your VAT obligations as soon as possible. That way you can ensure that your ordinary business operations will not be disrupted by the additional demands of VAT compliance. 

Many sole traders, who generally manage a number of business functions themselves, tend to worry about compliance issues when they arise. Fortunately, as a sole trader, you can outsource your VAT compliance and recovery to experts who will prevent disruption and optimize your VAT management.

Get in touch with VAT IT, the world’s leading VAT compliance and recovery specialist, to help you get ahead of your legal obligations as a sole trader and ensure you make optimal business decisions every step of the way.