Sole traders and VAT

When starting up as a sole trader, the concept of VAT is one that should be uppermost in your thoughts. This guide should tell you what you need to know.

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Is there a difference between a sole trader and being self-employed

Basically, if, at the end of any month, your annual turnover exceeds £61,000 in the previous 12 months or less you are required to register for VAT.

You can voluntarily register for VAT if the turnover is less than the threshold.

The question of being a sole trader or limited company is a matter of fact. If your trade as a sole trader (for example A. Smith or Arthur Smith) the VAT registration will be in that name.

If you have formed a limited company (Arthur Smith Limited) the VAT registration will be in that name.

Two Public Notices which offer relevant advice are:

  • Notice 700 – VAT General Guide
  • Notice 700/1 – Should I be registered for VAT?
  • Notice 700/15 – The ins and outs of VAT
  • These can be located here

The VAT advice line will help with queries on 0845 010 9000
The relevant form is an Application for Registration – VAT 1
You can download these from the internet here

If you have any doubts you should talk to your accountant who will explain the requirements in greater detail and help with specific queries or even complete the VAT return on your behalf.

This means that once registered you will be given a unique VAT number relevant to only your business.

Setting up a business: Sole trader vs limited company

You will be required to charge VAT usually at the standard rate of 17.5 per cent on your sales invoices, so that for example if your invoice value is £1,000 you will add £175 and the customer is required to pay you £1,175.

Every quarter you will complete a VAT return showing how much you have collected in VAT (all the £175s in the above example, called Output Tax) and how much VAT you have paid to your suppliers (called Input Tax) and you will be required to pay over the difference, assuming that that the Output Tax exceeds the Input Tax.

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