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Should I Be VAT Registered as a Sole Trader?

Despite their unincorporated status, sole traders are business owners, and that means a sole trader can be tax registered. However, that doesn’t mean they have to be. Read on to find out more about whether you should be VAT registered as a sole trader.

Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.

1. Do Sole Traders Pay VAT?

As a sole trader, whether you’re registered for VAT or not, you’ll be paying VAT on all the things you buy in your business. That’s because all businesses are legally required to charge VAT once their business turnover reaches a certain level set by HMRC.

Confused about How VAT Works? Read this guide to VAT here

2. What are the Vat Thresholds for Sole Traders?

The VAT thresholds for sole traders are actually the same for all businesses. This is regardless of their business structure. For the current tax year, 2022/2023, that’s a taxable turnover of £85,000 or more. So, whether you are a Limited Company, self-employed or in a partnership, you’ll be subject to the same VAT rules and must register for VAT***.

A VAT exemption means certain types of businesses can avoid registering for VAT under special circumstances. Find out how to apply for a VAT exemption in this guide.

*** Businesses with VAT exempt sales are considered outside the scope of VAT so cannot register for VAT and are unable to claim back VAT on expenses. Businesses that supply both taxable and exempt supplies can apply for a partial VAT exemption meaning they can claim back a portion of VAT on certain expenses.

3. Is it Worth Being VAT Registered as a Sole Trader?

Since you’ll be paying VAT on expenses in your business, for some it could be worth being VAT registered as a sole trader. This is because it means they can claim back VAT on everything they buy. In fact, many sole traders choose to register for VAT voluntarily even though their taxable turnover is below the vat limit of £85,000. For some, it does bring advantages. It means they can reclaim VAT that they pay and they hide their turnover despite the extra administration. However, there are some disadvantages of a voluntary VAT registration. Therefore, you should think carefully before you choose to do it.

4. How Does VAT Registration Work for a Sole Trader with Two Businesses?

Many sole traders have two businesses and run them separately. But, when it comes to VAT, the turnover of both businesses will be added together in determining whether the VAT registration threshold has been reached. Any VAT registration will apply to both businesses which means all the customers of the two businesses will need to pay VAT. (That said, it can present an issue for pricing or margins).

One potential way around this is to incorporate one business. This means running it as a Limited Company so it will be considered in isolation for VAT registration purposes. This can avoid both businesses being VAT registered but has additional reporting requirements and costs. Always get professional advice before adopting this approach.

VAT and Self-Assessment Tax Returns

A VAT registration is a separate registration to your sole trader registration – you’ll get a different code to your UTR number. If you are not registered for VAT you will have to pay VAT as though you are a consumer. This means you’ll include the VAT inclusive cost of your business expenses on your tax return. Only VAT registered businesses have the ability to claim back any VAT they have paid because they have access to relevant forms and they’ll include their expenses without VAT on their tax returns.