⚠️ We are currently updating our 2020/21 tax guidance across the website
Do I have to pay VAT if I am self-employed?
⚠️ VAT is a complex tax that attracts strict penalties. On this page, we take you through some of the various VAT related issues you may have as a self-employed person. Please note we give no more than an overview here.
Not all self-employed businesses need to be registered for VAT. This page explains what VAT is and when you may have to become a VAT-registered trader.
⚠️ The UK left the European Union (EU) on 31 January 2020 and entered a transitional period, currently due to end on 31 December 2020, during which EU law continues to apply in the UK. The UK’s relationship with the EU beyond the end of the transitional period has not yet been finalised. Please note that the guidance below reflects the law as it applied before the UK’s departure from the EU, and as it will continue to apply throughout the transitional period.
What is VAT?
VAT is Value Added Tax. It is a sales tax charged by VAT registered traders on the value of the goods or services supplied to their customers.
As explained below, the law requires UK traders with sales (turnover) above the VAT threshold to register for VAT and charge it on supplies of goods or services. The trader charges the VAT and then pays it over to HM Revenue & Customs (HMRC), the government’s tax-collecting authority.
Traders whose sales are below the VAT threshold do not need to register for VAT (but can do so voluntary) so not all traders are required to be VAT-registered.
What rate is VAT charged at?
The standard rate of VAT is 20%. Certain items are charged at lower rates, for example children’s clothing is charged at the rate of 0% whereas household fuel, for example gas and electricity is charged at the reduced rate of 5%.
Are all sales liable to VAT?
No, they are not. Some traders are not registered for VAT because their businesses have a low turnover (sales) – and some business activities do not attract VAT. For more information, see GOV.UK.
I have been charged VAT on some of the items I have bought. Can I get it back?
If you are not VAT registered then you will not be able to reclaim any VAT unless you are a visitor from overseas.
If you are a VAT registered trader, then you will normally set off the VAT you have been charged by your suppliers against the VAT you have charged your customers. This is done each time a VAT return is completed. The net amount of VAT shown on your VAT return must then be paid to HMRC. If you have paid more VAT to your suppliers than you have charged to your customers, you should receive a VAT repayment from HMRC upon submitting your VAT return.
When do I have to start charging VAT to my customers?
You must start charging VAT on sales once you are a VAT registered trader. This can be due to either compulsory or voluntary registration.
When your business income reaches the VAT registration threshold, you must consider whether you are legally obliged to register for VAT (this is compulsory registration)..
There are two separate tests for compulsory VAT registration:
Each month you need to total your sales for the month. You then need to keep a 12 month running total, that is, the total amount for that month and the preceding 11 months of your VAT taxable turnover. For many businesses, the VAT taxable turnover and sales will be the same. When that total reaches the VAT registration threshold (£85,000 for a 12-month period ending in 2020/21), you need to register by the end of the following month.
For example, if your VAT taxable turnover exceeds £85,000 for the twelve months to 31 August 2020, you need to register for VAT by 30 September 2020.
You must remember that you need to register for VAT if your VAT taxable turnover in ANY consecutive 12-month period reaches the registration limit – it is not just the level of VAT taxable turnover in your 12-month accounting period that you need to check.
- If at the start of any 30-day period you believe that your VAT taxable turnover for that 30-day period alone will exceed the VAT registration threshold (£85,000 for 2020/21), you need to register immediately.
Once you are registered for VAT you must then add VAT to your sales invoices at the appropriate rate and complete VAT returns.
Even if you are not required to register for VAT due to the level of your sales you may choose to register for VAT. This is known as voluntary registration. You might want to do this because you know the VAT you pay out on your purchases will exceed the VAT you must charge on your sales and so by registering for VAT you will be able to claim regular VAT refunds. If you are considering registering on a voluntary basis then you may want to read our news article: Are you in low paid self-employment and considering becoming VAT registered?
There is more information on registering for VAT on GOV.UK.
How do I register for VAT?
When do I have to make VAT returns to HMRC and pay my VAT?
Most businesses need to complete VAT returns quarterly. They must usually be completed and submitted within one month and 7 days of the end of the relevant period and payment made at the same time. For example, a VAT return for the 3 months to 30 June 2020 must be submitted by 7 August 2020. Subsequent VAT returns will need to be submitted for the 3-month periods to 30 September 2020, 31 December 2020, 31 March 2021 and so on.
The way in which most VAT returns must be filed has recently changed with the introduction of HMRC’s 'Making Tax Digital' regime in April 2019. See What is Making Tax Digital for VAT? for more detailed information on filing VAT returns.
If you struggle to deal with matters digitally, then you may qualify for exemption from digital filing of your VAT returns, for example if you have a disability, or you live in an area where broadband is unreliable. If so, HMRC should offer alternative arrangements to enable you to file your returns. You should contact HMRC to discuss this.
There are different types of VAT schemes which you may be eligible to use, and these are explained briefly below and also in the section Different ways to account for VAT on GOV.UK.
Are there any simplified VAT schemes which may suit my business?
Depending on the type of business and your annual sales, you may be able to choose to use a simplified VAT scheme. Below is a table which includes a brief summary of the main VAT schemes that self-employed businesses choose and where you can find further information. There are additional VAT schemes available which are not covered below; these are detailed under Different ways to account for VAT on GOV.UK.
|Scheme||Eligibility||Important points||More information|
|Annual accounting||Estimated VAT taxable turnover for next 12 months is £1.35 million or less.||
Submit one VAT return annually.
Make advanced VAT payments during the year.Not suitable if you anticipate regular VAT repayments.
|Cash accounting||Estimated VAT taxable turnover for next 12 months is £1.35 million or less.||VAT is calculated on actual cash receipts and payments rather than based on invoice dates.||See GOV.UK.|
Estimated VAT taxable turnover for next 12 months is £150,000 (excluding VAT) or less.
Pay VAT based on a fixed percentage of your sales, the percentage used depends on the type of business ran and you may also have to consider the amount of business expenditure incurred on ‘relevant goods’.
Do not claim VAT back on purchases except certain capital assets costing over £2,000.
What happens if I pay my VAT late?
Penalties for non-compliance with the VAT system are extensive. You can find out more at GOV.UK.
⚠️ However, please note that any VAT payments due between 20 March 2020 and 30 June 2020 will be automatically deferred as part of the government’s coronavirus support package for businesses. Payment can be made at any time up to 31 March 2021 and no late payment penalties or interest will be charged. For further information see our page on Coronavirus: Self-employment and paying tax.
What records do I need to keep for VAT?
Usually you should keep all the information relating to your VAT return, such as business invoices and receipts, for at least six years. You should check the detailed guidance on what you need to keep and how long for on GOV.UK.
Some changes relating to the record keeping requirements for VAT came into effect in April 2019 when the Making Tax Digital for VAT regime was introduced. If you must comply with the Making Tax Digital for VAT rules, then you will need to keep at least some of your records in digital format. See our section on digital recordkeeping which explains the new rules.
When do I no longer need to be VAT registered?
If your business is VAT registered, then you will need to cancel your VAT registration when you cease trading (unless you have sold your business as a going concern and the new owner has kept the same VAT registration number, but you should take professional advice in this situation). You must cancel your VAT registration within 30 days of ceasing to trade or you may be charged a penalty. You can notify HMRC online, or by completing form VAT7 available on GOV.UK.
You can also voluntarily cancel your VAT registration if you believe your VAT taxable turnover will be below the deregistration threshold of £83,000 in the next 12 months.
There is information on GOV.UK on what happens when you cancel your registration and on completing your final VAT return, and more detailed information about deregistration in HMRC’s deregistration manual.
After cancelling your VAT registration, you need to keep your VAT records for six years.
Where can I get further information on VAT generally?
GOV.UK has information on VAT including: deadlines for filing and payment, reclaiming VAT, VAT visits and inspections, partnerships and using VAT online services.
HMRC have developed webinars and e-learning resources to help you understand VAT, a list of these are on GOV.UK.