Do I have to pay VAT if I am self-employed?

Updated on 17 November 2017

VAT is a complex tax that attracts strict penalties. In this section, we take you through the various VAT related issues you may have as a self-employed person.

Not all self-employed businesses need to be registered for VAT. This section explains what VAT is and when you may have to become a VAT-registered trader.

We give no more than an overview here.

What is VAT?

VAT is Value Added Tax. It is a tax charged on traders that they recover from their customers.

As explained below, the law requires that UK traders with sales (turnover) above the VAT threshold 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, the government’s tax-collecting authority.

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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 are charged to VAT at the rate of 0% whereas household fuel, for example gas and electricity is charged at the reduced rate of 5%.

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Are all sales liable to VAT?

No, they are not. Some traders are not registered for VAT because their businesses are small – and some business activities do not attract VAT. For more information, see GOV.UK.

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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 in your VAT return and then pay over the net amount of VAT shown by your VAT return to HMRC. 

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When do I have to start charging VAT to my customers?

When your taxable supplies reach the VAT registration threshold, you will need to register for VAT.

You need to consider two separate tests for VAT registration:

  1. Each month you need to total your sales for the month. You then need to keep a 12-month running total, ie the total sales for that month and the preceding 11 months. When that total reaches the VAT registration threshold (£85,000 for a 12 month period in 2017/18), you need to register by the end of the following month.
     

    For example, if your turnover exceeds £85,000 for the twelve months to 31 August 2017, you need to register for VAT by 30 September 2017.

    You must remember that you need to register for VAT if your total sales in ANY consecutive 12 month period reaches the registration limit – it is not just the level of sales in your 12 month accounting period that you need to check.
     

  2. If at the start of any 30 day period you believe that your turnover for that 30-day period alone will exceed the VAT registration threshold (£85,000 for 2017/18), you need to register immediately.

You must remember that you need to register for VAT if your total sales in ANY consecutive 12 month period reaches the registration limit – it is not just the level of sales in your 12 month accounting period that you need to check.

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How do I register for VAT?

You complete form VAT1. You can find out more about when to register for UK VAT on the GOV.UK website.

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When do I have to make VAT returns to HMRC?

Most businesses need to complete these quarterly. They must usually be completed online and submitted within 37 days of the end of the relevant period and payment made at the same time. You can find out more at GOV.UK.

There are different types of VAT schemes which you may want to use if you are eligible to do so. These are explained further in the section ‘accounting for VAT’ on the GOV.UK website.

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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.

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