Sole Trader VAT Threshold: A Guide for Self-Employed Individuals

Are you an entrepreneur setting out to create your own business and build your dream from the ground up? Congratulations. This is a fantastic step that takes a lot of courage and foresight. It also makes you a sole trader in the eyes of the tax authority and asks that you manage your taxes as such. However, the moment you step over the Value Added Tax (VAT) threshold of £85,000 taxable turnover, you’ll join all the other companies paying VAT regularly even though you’re a solopreneur.

But before we dive into VAT registration and the significance of understanding VAT as a sole trader, here’s a quick reminder of what VAT is and how it works:

VAT is a tax placed on almost all goods and services sold by a business to other businesses and consumers, and the amount of VAT you pay is dependent on how much it costs, the sector you’re in, and the type of VAT you registered for your business. If you don’t register for VAT and your turnover exceeds the VAT threshold determined by HMRC, then you are liable for a fine from the tax authority and potentially could place your business at risk.

In short, you will need to register for and pay, VAT if you exceed the threshold, even if you’re one person running the business. You can also, if you want, register for VAT even if you are below the threshold if you’d like to get reimbursed for the VAT you spend on business items.

What is a Sole Trader?

A sole trader is, very simply, someone who runs their own business and is also known as a solopreneur or self-employed.

The benefits of being a sole trader are that you decide your business name, keep all your business profits after tax, and decide where your business is going.

On the flip side, you are responsible for everything around your business, which includes any losses, paying your taxes on time, registering for VAT, and remaining compliant with regulations and legislation. This can be quite time-consuming.

Being a sole trader is very different from other business structures as you’re a single person doing what a team of people would do in a larger company. You’re the accountant, salesperson, marketing manager, customer liaison and service provider.

According to HMRC, you will need to set up your business as a sole trader if you meet the following requirements:

• You have earned more than £1,000 as a self-employed person over the period of a year
• You want to make Class 2 National Insurance payments to qualify for benefits, or you need to prove you are self-employed to claim tax-free childcare

The Current VAT Threshold for Sole Traders

The VAT threshold is the same for any company operating in the UK, so if you can tell that your annual taxable turnover – the amount of income your business has made over a 12-month period – is about to exceed £85,000, then you’ll need to register for VAT.

The average VAT percentage is 20% in the UK and 21% in Europe and, of course, there are exemptions around VAT that can change how much you pay, how much you are reimbursed, and how it is structured.

Registering for VAT as a Sole Trader

The moment you earn over the VAT threshold, you will need to register for VAT – it doesn’t matter if you’re a sole trader or a large business. You cannot register for VAT if your company sells VAT-exempt products and services such as insurance, finance, credit facilities, education, training, subscriptions, charity initiatives, and certain commercial property activities.

When to register

You have to register for VAT if you go over the £85,000 threshold, but you can also register for VAT if you earn below the threshold. Registering for VAT can be very beneficial for your business as you will have any VAT you spent on business items and expenses reimbursed because you can claim them back when you file a return. Also, especially for a sole trader, there is a sense of credibility that comes with being VAT registered, making other companies and your customers feel that they are dealing with a company with a solid reputation and a reliable income flow with trusted service delivery.

The process of VAT Registration

Registering for VAT isn’t complex. The online system has been designed to make it as easy as possible for you to go through the process. To find out exactly what paperwork you need and how to register your business for VAT, both online and via post, follow our in-depth guide.

Managing VAT as a Sole Trader

Managing VAT as a sole trader is the same as managing VAT as a business. You need to accurately report the amount of VAT you’ve charged on items, as well as the amount of VAT you’ve spent on items for the business so that you can accurately complete your VAT submission forms.

Currently, the standard VAT rate on most goods and services is 20%, but there are exemptions that are charged less VAT, are zero-rated for VAT, or are VAT exempt. You need to know exactly how much VAT you are supposed to charge.

You will need to use the new Making Tax Digital (MTD) for VAT system to maintain digital records of your VAT using software compatible with MTD to submit your returns. You, or any agents you’ve hired to manage your VAT returns, must use MTD and comply with any requirements.

In short – managing VAT as a sole trader asks you to keep meticulous records and stay on top of your VAT returns to be compliant and prepared.

VAT returns

Once you’ve registered for VAT, you need to submit a VAT return regularly. Your due dates will depend on what you have arranged with HMRC, but monthly is the most common deadline. You can learn exactly how to manage your VAT returns in our in-depth guide.

Paying VAT to HMRC

Now that you’ve registered and submitted your return, it’s time to pay your VAT. Fortunately, this is just as easy as every other step in the VAT process; you can do everything online. You will need to pay the bill in time to meet the deadline on your VAT return, which is usually one month and seven days after the end of your last accounting period.

If you are still determining when you should pay your VAT or submit your return, log into your online account with HMRC and it will give you all the information you need.

Penalties for Exceeding the VAT Threshold Unregistered

If you don’t register for VAT and you’re operating at an annual turnover of more than £85,000, then you are liable for penalties from the tax authority. The size of the penalty will entirely depend on the amount of VAT due to HMRC and how late your notification.

HMRC calculates the penalty by taking the amount of VAT due – calculated by subtracting input tax from output tax – and adding on a percentage penalty rate based on the time it took to submit your registration. 

• Less than nine months – 5%
• More than nine months but less than 18 months – 10%
• More than 18 months – 15%

There is also a minimum penalty of £50. 

While there are options to apply for your penalty to be changed or removed, you will have to undergo an extensive process to do so. The best option is to ensure you keep accurate track of your finances so you don’t neglect to notice you’ve passed the VAT threshold.

VAT Threshold and Brexit

As of 01 January 2021, VAT-registered companies doing business with customers in the European Union have to abide by a series of changes to VAT payments, charges and registration.

VAT changes post-Brexit

Thanks to Brexit, quite a few changes were made, to stay informed and understand the impact of these changes, read our detailed article on managing the challenges and opportunities around VAT post-Brexit.

This can seem daunting to navigate, especially with so many different rules, clauses, sub-clauses and amendments to consider. If you want support with your post-Brexit VAT compliance, Blue dot has precisely what you need. Blue dot’s VATBox solution makes it easy for companies to manage their VAT across multiple jurisdictions, currencies and regulations. We help you to optimise, manage and analyse your company’s global and local VAT recovery processes while helping you to dodge unavoidable costs and accidental non-compliance.

Brexit’s Effect on Sole Traders

Currently, the limitations around trading goods and the complexities within the trade agreement between the European Union and the UK have made it very difficult for sole traders. In a recent survey, it was found that 56% of companies are struggling to adapt to the new rules while 44% can’t obtain visas for their employees, and most are finding it is becoming an incredibly time-consuming problem they are battling to navigate.

Blue dot’s VAT Compliance Solution

Blue dot has developed an exceptional VAT compliance solution perfect for sole traders wanting to stay ahead of their VAT requirements and global tax regulations. Our intelligent, AI-powered platform automatically tracks, reports, and calculates your VAT so you can easily stay ahead of your VAT admin. Our VAT reclamation platform centralises your entire VAT reporting process end-to-end, enabling you to easily report and manage your VAT compliance while ensuring you can recoup 100% of your eligible VAT expenses. Digitalising your VAT process helps you reduce your audit  risks, and automating your compliance allows you to reduce significant manual admin work and eliminate errors, which allows you to save significant money in operational costs. We help you make the most of your VAT with a solution trusted by world leaders, including Michelin, SAP, and Dell.

Navigating VAT as a Sole Trader with Confidence

If you remain ahead of VAT regulations, understand your VAT compliance requirements, submit your VAT returns on time, and ensure your documentation is kept meticulously, then you will confidently navigate VAT as a sole trader. However, this adds a lot of extra work – and to manage this successfully you need the right tools, documents, and comprehensive visibility into your VAT charges. Take advantage of the extensive knowledge provided in the Blue dot blog library to understand everything you need to know about VAT, and then let Blue dot’s technology help you stay on top of your VAT compliance and optimise your recovery potential.