Do I need to register for VAT? A guide for SMEs, freelancers and sole traders

Knowing whether or not you should register for VAT can be the cause of much confusion, especially for growing businesses that haven’t previously encountered the rules and recommendations around this type of tax.

For the average consumer, VAT is often taken for granted as part of the total cost of a purchase. In fact, people rarely think about VAT unless they decide to analyse the fine print on a sales receipt.

The reality is very different for business owners. Even though it may have a neutral impact on their profit, it’s crucial that businesses pay close attention to VAT requirements as poor management and simple misunderstandings can lead to costly mistakes and supply chain issues further down the line.

If you are an SME, freelancer, or sole trader thinking about registering for VAT then it’s worth doing your research and seeking the advice of an experienced accountant to ensure compliance with HMRC guidelines. This essential guide is geared towards small business owners that are looking to find more information about how VAT may affect their operations, as well as the key steps involved in VAT registration.

What is VAT – and when should you register for it?

Value Added Tax – commonly known as VAT – is the sales tax added to the price of goods and services at the point of purchase. The standard rate of VAT in the UK currently stands at 20%, which is the rate charged on most purchases.

If your company’s taxable turnover is more than £85,000 then you are legally required to register for VAT with HMRC. This is referred to as compulsory registration. Once your business exceeds this threshold you must notify HMRC within 30 days of the end of the month in which it was exceeded. The registration date will be the first day of the second month after your taxable supplies went over the registration threshold. For example, if the threshold was exceeded on 31 May then your registration date will be 1st July. This is referred to as voluntary registration.

As soon as your company is registered, you must charge VAT on all eligible goods or services and submit this money to HMRC. On the other hand, you can also reclaim VAT on any eligible goods or services that your business buys, which means your business is effectively paying 20% less for those items than when it wasn’t registered for VAT.

Remember it is an offence to charge VAT on any sales if your company is not registered with HMRC and does not have an official VAT number. You can check if a business is registered for VAT using the government website.

What are the pros and cons of voluntary registration?

Businesses may voluntarily register for VAT in order to start claiming back VAT costs incurred on their own purchases. This can help improve cash flow and offset the total cost of business supplies. For smaller businesses, voluntarily registering for VAT and displaying a VAT number may also give the impression that they are a larger, more established company. This might help generate greater appeal among their target market, customers, lenders, and suppliers.

However, if you are a B2C business or the majority of your customers are not VAT-registered then voluntary registration will likely mean these customers end up paying a higher overall price for the same goods or services. Your business could also receive a bigger VAT bill from HMRC if more VAT is generated through customer sales (output VAT) than goods and services purchased from other vendors (input VAT).

If you make only zero-rated supplies, you can still register for VAT as a ‘repayment trader’ and recover any VAT on all your business costs.

Registering for VAT in the UK – Your step-by-step guide

Step one: Discuss your situation with a VAT expert

Before you register for VAT, it’s a good idea to get the advice of a VAT expert who has been through the process many times before. Naturally, your best course of action will depend on your circumstances as a business and whether your intention is compulsory or voluntary registration.

Whether you decide to partner with an accountant or not, a second opinion can be incredibly valuable when determining your legal obligations and deciding how best to structure your business for sustainable long-term growth.

Step two: Register online

Most companies can register for VAT online by logging in through the Government Gateway portal. You will need to provide key details such as your Unique Taxpayer’s Reference (UTR), incorporation details, annual turnover, business activity, and bank details.

From August 2022, HMRC changed their online registration system and certain information is now mandatory that was not previously and this includes a business’s UTR.

Alternatively, many business owners choose to relieve the stress of managing VAT themselves by appointing an accountant or agent to deal with HMRC obligations and compliance matters, maintain accurate records and submit returns on their behalf.

If you choose to register for VAT yourself, we would strongly recommend you take a copy of the information you have submitted and ensure you retain the reference number for your application (this begins with VRS 099).

Step three: Explain the changes to your customer base

Registering for VAT means that you will now be due to charge an additional 20% fee on all your sales invoices. This might come as a surprise to your existing customers, so it’s important to keep them informed of the change ahead of time and fully aware of what to expect the next time you invoice a sale.

Step four: Navigate the waiting period

Your business should receive an official VAT registration certificate and number within 30 working days of registration. This will be sent directly to your online account, or via post to the agent that has registered on your behalf.

Please note you cannot officially charge VAT on any sales until you have received your certificate and number. However, you will still need to pay any VAT due to HMRC from the point of registration. Businesses, therefore, need to add an additional 20% charge to any invoices issued during the transition period, and then re-issue these invoices once they have received their VAT certificate and number.

Step five: Receive your VAT certificate and VAT number

Once your VAT certificate arrives, make sure to re-issue any invoices sent to your customers during the interim period. This ensures every customer can reclaim input VAT on their purchase by referring to your official VAT number. Every subsequent invoice should include these details as standard.

Do I need to register for VAT as a sole trader or freelancer?

All businesses must adhere to HMRC’s VAT registration threshold and guidelines, no matter whether they are operating as a limited company, sole trader, partnership, or other structure. The same goes for any type of e-commerce stores, such as eBay, Shopify or Etsy.

The golden rule is that registration is based on taxable income rather than the setup of your business. The latest ONS statistics estimate that there are currently 2.7 million businesses registered for VAT in the UK, a figure which accounts for many different types of company structure. Again, if you are unsure about your current situation then make sure to seek the advice of an accountant specialising in VAT.

Are any businesses exempt from VAT registration?

Yes, although this will depend on the exact nature of the goods or services that a business provides. There are numerous industries that involve items which are exempt or outside the scope of VAT, including:

• Betting and gaming – including pool betting and games of chance
• Financial services and investments
• Insurance
• Education and welfare services
• Residential letting

Please note this is a non-exhaustive list and that a more detailed breakdown of varying VAT rates is available through the GOV.UK website.

If you believe that exceeding the VAT threshold is a temporary one-time event for your business then you may also submit an exemption request to HMRC explaining the situation with supporting evidence. Requests for exemption are handled on a case-by-case basis, though HMRC will need to be satisfied that your taxable turnover over the subsequent 12 months will not exceed the deregistration threshold of £83,000.

What happens if I don’t register for VAT in time?

Although it should be avoided wherever possible, there are instances whereby a business fails to register for VAT within 30 days of exceeding the threshold. The leniency of HMRC depends on multiple factors, such as how the error was discovered, how much time has passed since the error was discovered, and whether the business owner can provide a reasonable excuse.

Cases where the business has quickly realised and reported the error themselves are generally dealt with in a more favourable light, though the business may still incur additional penalties without a reasonable excuse such as family bereavement, serious illness or doubt around liability of supplies.

However, if HMRC discovers the failure to register as part of an audit or has any reason to believe that the error was intentional then the additional penalties will be more severe. Penalties are calculated as a percentage of the VAT due from the date when the business should have registered to the date that HMRC became aware of the omission:

• Not more than nine months late – 5%
• More than nine months late, but less than 18 months late – 10%
• More than 18 months late – 15%

If you disagree with either your liability or the amount of the penalty you have the statutory right to an independent review. You should request a review within 30 days of the date of HMRC’s letter notifying you of the amount of the penalty.

When can you claim back VAT on purchases?

Once registered, your company can reclaim input VAT on any eligible goods and services purchased for exclusive use by the business. This includes items like office equipment, electronics, transport costs and professional service charges, to name just a few.

An experienced accountant can assist with managing VAT returns and leave no stone unturned when maximising the amount of VAT that you are able to reclaim on your purchases.

Filing your VAT returns

In most cases, your business will need to submit a VAT return to HMRC once per quarter, which is why it’s important to keep accurate records and invoices as supporting proof for any reimbursement that show how you arrived at a particular proportion for a purchase.

As part of each return, you will also need to calculate how much output VAT your business has charged on services and goods during the same period. For instance, if your company charged a total of £10,000 of output VAT on goods and services sold and paid £5,000 in input VAT on products and services it bought then the calculation would be:

£10,000 (output VAT) – £5,000 (input VAT) = £5,000 in VAT to pay HMRC.

VAT returns must be submitted using Making Tax Digital (MTD) compliant software, this can include XL bridging software and HMRC provide a list of software here.

Can I deregister my business from VAT?

Yes, you can request that HMRC cancels your VAT registration voluntarily if your taxable turnover falls below the deregistration threshold of £83,000. Some businesses decide that it isn’t in their best interest to remain registered for VAT, whether that’s because of a drop in sales, a poor forecast for the following year, or other extenuating circumstances.

It is also compulsory to deregister from VAT if you meet one or more of the following criteria:

• Your company has ceased trading and will not generate any further taxable revenue
• The business has been sold
• Your company joins a separate VAT group, or a VAT group is disbanded
• The legal structure of your business changes, e.g. from sole trader to a limited company

Get support for all your VAT requirements

VAT is a complex area of tax that benefits greatly from the expertise of a skilled accountant. Not only that, time is precious and many business owners find it worthwhile to delegate the responsibility to a professional who is well-used to finding opportunities to minimise taxation and fuel sustainable growth for their business.

If you need support with VAT registration, quarterly HMRC returns or simply wish to discuss your options, Gerald Edelman’s specialist VAT team is here to help. Get in touch with one of our friendly consultants below to talk through the particulars of your case and we will be happy to advise on your best course of action.