VAT advice: You must register for VAT (Value Added Tax) if your VAT taxable turnover (not your profit) is over £85,000 over a 12 month period. This is a rolling 12 month period rather than a fixed period like a tax year or calendar year. So if your turnover goes over £85,000 in any 12 month period, or you know that it will, you must register for VAT.
Your self employed VAT taxable turnover is all of your turnover that is not exempt from VAT.
Being registered for VAT means that you are responsible for charging your customers VAT, which you collect on behalf of HMRC. The standard rate of VAT is 20%. You also recover the VAT that you have paid on your business purchases and expenses (input tax) which you deduct from the VAT you have charged your customers before paying the balance to HMRC.
VAT advice – Flat Rate Scheme
As long as your turnover is less than £150,000 you can opt to join the VAT Flat Rate Scheme. This means that, instead of deducting the VAT on your purchases from the VAT you have collected from your customers, and then paying the difference to HMRC, you pay a fixed rate to HMRC according to the type of business you run. The principal advantage of the scheme is that it is easier to administer, and you also benefit from an additional 1% reduction of the fixed rate for your first year. The disadvantage is that you can’t reclaim VAT on your purchases except for certain capital assets over £2,000.
The scheme used to be particularly attractive for those with low business costs, for whom the fixed rate they paid to HMRC left them better off than if they were to just reclaim the VAT on their actual purchases. But these low cost businesses – those whose costs are less than 2% of their turnover or £1,000 a year, whichever is greater – now pay a higher fixed rate which means that for most people this advantage has been removed. It is worth looking at whether the flat rate scheme is the best solution in your circumstances.
Voluntary registration for VAT
You can also register for VAT voluntarily if you’re below the threshold. This may be advantageous if you have a lot of business costs to recover, but you’ll have to charge your customers VAT as well. If your customers are businesses or large organisations this may not be a problem as they will probably be registered for VAT themselves so can recover the VAT you charge them. But if you are selling goods or services to customers who are not VAT registered, they may be put off by the additional VAT charge. So you should think carefully about the circumstances of your business and work out which option is best for you.
Accounting for VAT when you’re self employed
When you register for VAT you’ll be given a VAT number and you should charge VAT from that point.
You’ll have to keep adequate records including copies of the invoices you give to your customers and the VAT you have paid on your purchase and expenses. Records must be kept for at least 6 years.
You must issue invoices in a valid form, though for retail supplies under the value of £250 this can be in a simplified form.
As long as your turnover is £1.35 million or less, and your VAT arrangements are in good order, you’ll probably be able to use the cash accounting scheme, which means that you only account for VAT that you have charged your customers when you are paid and you only claim VAT on your inputs when you pay your supplier. This is simpler to administer and could help your finances because you only pay VAT to HMRC when you have been paid.
VAT returns are usually submitted quarterly and this can be done online. You can opt to submit annual returns, subject to certain conditions, in which case you’ll have to make quarterly or monthly instalments calculated by HMRC.
Can I claim for VAT before registering?
You can claim for VAT that you pay on purchases before registering for VAT, as long as they relate to the VAT taxable goods or services that you supply and as long as they haven’t been used up before you register.
The time limits are:
- 4 years before registration for goods
- 6 months for services
Making Tax Digital for VAT
From April 1st 2019, businesses including self employed people with a turnover above the VAT threshold (currently £85,000) have been required to submit digital returns for VAT.
Making Tax Digital (MTD) does not require you to keep additional records for VAT, just to record and submit them digitally.
If you use MTD you will need MTD-compatible software to keep digital records and exchange data with HMRC. This can be in different formats including conventional spreadsheets but if it is not capable of exchanging data directly with HMRC it will need to be used in conjunction with bridging software.
Did you enjoy reading about VAT Advice?
Read the first section ‘Becoming Self-Employed‘