Do I have to pay VAT if I am self-employed?
VAT is a complex tax that attracts strict penalties. In this section, we take you through some of 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 sales 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.
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%.
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.
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.
When do I have to start charging VAT to my customers?
When your business income reaches the VAT registration threshold, you will need to consider whether you need to register for VAT.
There are two separate tests for VAT registration:
Each month you need to total your sales for the month. You then need to keep a 12 month running total ie 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 in 2018/19), 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 2018, you need to register for VAT by 30 September 2018.
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 2018/19), 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.
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?
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. Also, see our What is Making Tax Digital for VAT? section below.
If you struggle to deal with matters online, then you may qualify for exemption from online 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.
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 more 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 ‘Accounting for VAT’ on the GOV.UK website.
|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.
|See the GOV.UK website.|
|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 the GOV.UK website.|
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.
|See the GOV.UK website.|
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.
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 the GOV.UK website.
Some changes relating to the record keeping requirements for VAT are due to come into effect in April 2019. See our section on What is Making Tax Digital for VAT? which explains the new rules.
What is Making Tax Digital for VAT?
In April 2019 HMRC’s first phase of their ‘Making Tax Digital’ programme is being introduced, and this is known as ‘Making Tax Digital for VAT’. This will apply to all businesses who are VAT registered because the level of their turnover requires them to be. Therefore it does NOT apply if you are voluntarily registered for VAT.
The ‘Making Tax Digital for VAT’ regime will require you to maintain digital business records for VAT purposes and also to file your VAT returns using digital means. This means that some kind of electronic record keeping system must be used. This could be an accounting software package, a spreadsheet-based system or maybe via an ‘app’ on a smartphone. Many of these products are still in development but they should begin to become available during the course of 2018. A list of products which are approved by HMRC as complying with the MTD requirements will be available on GOV.UK in due course. HMRC expect that there will be a range of options to choose from by April 2019. HMRC are not producing their own software or app to enable digital records to be maintained and therefore it will be necessary to purchase a system you feel is suitable for your business and within your budget.
Your digital record keeping system must also enable you to file the VAT return digitally with HMRC directly from within the software. You cannot not use the HMRC VAT online service to file VAT returns once you are in the ‘Making Tax Digital for VAT’ regime.
HMRC will maintain a list of products that comply with the ‘Making Tax Digital for VAT’ requirements on the GOV.UK website in due course. We will update this page when this becomes available.
|Choosing an accounting system for your business is a big decision and you must make sure you find one which is suitable for you. As April 2019 is not far away, this is something that you should start to consider as soon as possible so that you are familiar with your systems by the time the new rules apply. If you can afford to, you may want to take professional advice.|
If you struggle to deal with matters online, for example if you have a disability, or you live in an area where broadband is unreliable then you may qualify for exemption from complying with the digital record keeping requirements. The method for claiming exemption has not yet been published by HMRC. We will update this page when this information becomes available.
HMRC will be able to provide some help if you do not qualify for exemption, but need support with digital processes nonetheless. We will update this page with details on how to access this support when it becomes available.
If you do not maintain adequate digital records and do not qualify for exemption from the ‘Making Tax Digital for VAT’ process you may be liable for penalties. More details will be added when the rules relating to penalties have been finalised by HMRC.
Where can I get further information on VAT generally?
The GOV.UK website has information on VAT including: deadlines for filing and payment, reclaiming VAT, VAT visits and inspections, and using VAT online services.
HMRC have developed webinars and e-learning resources to help you understand VAT, a list of these are on the GOV.UK website.