You may not realise it, but Value Added Tax (VAT) will have touched your life in some way, shape or form throughout your life. 

If you're self-employed, you'll need to know about VAT. We’re here to debunk some of the myths and help you understand how, as a self-employed person working in the UK, you can use VAT registration to your advantage. 

What is VAT?

Value Added Tax (VAT) is a tax charged on most goods and services bought and sold within the UK and EU. It’s known as a consumption tax because the cost of the tax is ultimately paid by the consumer of the product. 

It’s important to be aware of VAT as you may be required to register, depending on your taxable turnover, which we’ll explore later.


What is the rate of VAT?

The amount a business will have to charge for VAT is determined by the government and will depend on the type of product or service that is being sold. 

In the UK, there are three rates of VAT which are applied to goods and services:

  • Standard Rate (20%) - Typically applied to most goods and services in the UK
  • Reduced Rate (5%) - Typically applied to domestic fuel like gas and electricity and certain building work, including converting a building into a house or flats or from one residential use to another or renovating an empty house or flat. 
  • Zero Rate (0%) - Applies to things like books and newspapers (not ebooks), brochures and public transport, along with building new houses or flats.




current VAT rates UK

 

When do I need to charge VAT?

When you go self-employed, it’s important to know when you’ll be required to register for VAT. In the UK, if your taxable turnover goes above the ‘threshold’ of £85k, you must become VAT registered.

You can voluntarily register for VAT if your earnings fall beneath the threshold though. In many cases, you may even be financially better off by doing so. 

You can calculate whether you’ll be better off becoming VAT registered by using our handy Money Maximiser Calculator.


What is VAT taxable turnover? 

You can work out your VAT taxable turnover by calculating the value of everything you’ve sold. You’ll need to ignore any sales that are VAT exempt. 

If your VAT taxable turnover exceeds the £85k threshold within a rolling 12 month period, then you’ll need to register for VAT. 


What should I include when I calculate my VAT taxable turnover?

There are a few things that you must make sure you include when you’re working out your VAT taxable turnover.

These include: 

  • Goods you hired or loaned to customers
  • Business goods you’ve used for personal reasons
  • The goods you’ve bartered, part-exchanged or given as gifts
  • The services you’ve received from businesses in other countries that you've had to ‘reverse charge’
  • Any building work that amounted to more than £100k that your business did for itself
Important note: Make sure you include any items that are zero-rated. The only things you should exclude are VAT-exempt sales and goods or services that you’ve supplied outside of the UK.

 

How do I register for VAT?

Registering for VAT can seem like a daunting and confusing process. The process has changed slightly since Making Tax Digital for VAT came in.  

You can either register online by creating a VAT online account, sometimes referred to as a ‘Government Gateway account’, or you can use an agent like IN-SYNC Tax who will take care of everything for you. 

As a sole trader, there are a few things you'll need before you start the process if you're going to do it yourself: 

  • The right compatible software for submitting your VAT return
  • A Government Gateway user ID and password if you haven't already got one. You'll need to register if you haven't. 
  • Your National Insurance Number

If you're a limited company or registered society, you'll also need:

  • The company registration number with Companies House
  • Your Unique Taxpayer Reference
  • The postcode you've registered for your Self Assessment

Once you’ve registered, you should receive a confirmation email within 72 hours. It'll come from [email protected] If you haven't received it in this time, make sure you check your spam folder.

Important Note: You shouldn't submit your VAT return until after you've received the confirmation email and you also shouldn't be asked for any financial information in that email.

 

Reclaiming your VAT

Once your business is VAT registered, you’ll be required to start paying over any VAT due to HMRC. However, you’ll also be entitled to reclaim the VAT you paid on purchases you made, so long as they relate to the goods or services that you supply.

There are two popular ways that you can reclaim VAT in the UK:

  • Standard VAT Accounting
  • Flat Rate Scheme for VAT 

 

Standard VAT accounting

The Standard VAT accounting Scheme is the most common method of reporting your VAT.

Using this process, you’ll need to submit a VAT return each quarter and pay over anything you owe.

You’ll either have a bill to pay or have a refund to claim back, depending on your turnover and expenses. 

Your liability or refund is calculated by comparing the amount of VAT you should have paid on your purchases against the amount of VAT you owe against your sales. 

If the VAT on your expenses amounts to more than the amount you need to pay for the VAT on your sales, you’ll be entitled to a refund from HMRC. 

 

Example calculation using Standard VAT Accounting

Using the Standard method just means you take away the VAT you’ve paid on business expenses from the VAT you’ve received from your customers. 

It helps to remember these two phrases:

Input VAT: The VAT you paid on the goods you bought

Output VAT: The VAT you charged on the goods you sold


So, if you paid £200 of VAT on your business expenses and you charged £500 of VAT to your customers, you would pay £300 to HMRC and keep £200

 

standard VAT example UK


Flat Rate Scheme for VAT

What is the VAT Flat Rate Scheme (FRS)?

HMRC introduced the Flat Rate VAT Scheme to help small businesses and the self-employed simplify their VAT reporting.

With the FRS, you still charge your clients 20% VAT, but will no longer have to pay HMRC the full 20%. Instead, you'll now pay a set rate of VAT based on a fixed percentage of your turnover. This will vary depending on your business type.

You won’t need to calculate the exact VAT you’ve paid on your business expenses either, bonus!

If you’re a contractor or a sub-contractor, you may even be eligible to backdate your VAT registration up to four years.

See our section on Backdated Effective Date of Registration in our guide to VAT.

 

How does the VAT Flat Rate Scheme (FRS) work?

As an example, if you work in construction you will pay VAT over to HMRC at 14.5%, whereas couriers or taxi drivers pay over at 10%. The difference between what you charge and what you pay to HMRC is yours to keep. See some examples below:

 

Flat rate scheme example

 

Type of business

2018/19 & 2019/20 flat rate (%)

Accountancy or bookkeeping

14.5

Advertising

11

Agricultural services

11

Any other activity not listed elsewhere

12

Architect, civil and structural engineer or surveyor

14.5

Boarding or care of animals

12

Business services not listed elsewhere

12

Catering services including restaurants and takeaways

12.5

Computer and IT consultancy or data processing

14.5

Computer repair services

10.5

Entertainment or journalism

12.5

Estate agency or property management services

12

Farming or agriculture not listed elsewhere

6.5

Film, radio, television or video production

13

Financial services

13.5

Forestry or fishing

10.5

General building or construction services

9.5

Hairdressing or other beauty treatment services

13

Hiring or renting goods

9.5

Hotel or accommodation

10.5

Investigation or security

12

Labour-only building or construction services

14.5

Laundry or dry-cleaning services

12

Lawyers or legal services

14.5

Library, archive, museum or other cultural activity

9.5

Limited cost trader

16.5

Management consultancy

14

Manufacturing fabricated metal products

10.5

Manufacturing food

9

Manufacturing not listed elsewhere

9.5

Manufacturing yarn, textiles or clothing

9

Membership organisation

8

Mining or quarrying

10

Packaging

9

Photography

11

Post offices

5

Printing

8.5

Publishing

11

Pubs

6.5

Real estate activity not listed elsewhere

14

Repairing personal or household goods

10

Repairing vehicles

8.5

Retailing food, confectionery, tobacco, newspapers or children’s clothing

4

Retailing pharmaceuticals, medical goods, cosmetics or toiletries

8

Retailing not listed elsewhere

7.5

Retailing vehicles or fuel

6.5

Secretarial services

13

Social work

11

Sport or recreation

8.5

Transport or storage, including couriers, freight, removals, and taxis

10

Travel agency

10.5

Veterinary medicine

11

Waste or scrap dealing

10.5

Wholesaling agricultural products

8

Wholesaling food

7.5

Wholesaling not listed elsewhere

8.5

 

Important Note: Irrespective of your flat rate percentage, you also receive a 1% discount if you’re in your first year of registration.


*Labour-only building or construction services are building services in which the value of materials supplied is less than 10% of the turnover.

How do I calculate what I should pay through the VAT Flat Rate Scheme?

To calculate how much VAT you have to pay to HMRC, simply add 20% VAT to your total Gross Earnings (Earnings before any Deductions or Additions) and then apply your Flat Rate percentage (as per your business type) to this figure.

This percentage is how much of your “Total Sales” you need to pay to HMRC. Use our handy Money Maximiser Calculator if you’re unsure.

 

Example using 14.5% Flat Rate calculation

If your business charges £1,000 to a client for your services, the client will pay £1,200 when you include the 20% standard rate of VAT (£200). 

Your business will pay HMRC 14.5% of £1,200, which is £174 and you will record the difference (£26) as income. 

 

Important Note: You can’t reclaim the VAT you paid on any purchases under the Flat Rate Scheme, apart from certain capital assets that are more than £2k. 


How do I leave the VAT Flat Rate Scheme?

To voluntarily deregister yourself from the VAT FRS, your annual turnover needs to be below £85,000. If your annual turnover is below this amount, you can leave the FRS. Our customer service team will work with HMRC and take care of the administration on your behalf.

 

What is a Limited Cost Trader? 

You’re a Limited Cost Trader (LCT) If the amount you spend on relevant goods* including VAT is either:

  • Less than 2% of your VAT flat rate turnover (in a prescribed accounting period)
  • Greater than 2% of turnover including VAT, but less than £1000 per year (if the prescribed accounting period is one year). If it is not one year e.g. quarterly VAT returns, the figure is the relevant proportion of £1000, for a quarterly return this is £250

 

*Relevant goods are physical items or materials that are only used for business purposes. If you use these items for both business and personal they do not qualify, such as a mobile phone used for both. Examples of relevant goods items include:

  • Stationary
  • Tools
  • Personal Protective Equipment (PPE)
  • Materials such as brick, timber or aggregate
  • Vehicle costs including fuel if you are operating in the transport sector, using your own or leased vehicle

 

Following the change in the law from April ’17, anyone who uses the FRS method of VAT will need to pass an expenses test to stay on their current percentage rate. Those who fail this test are referred to by the HMRC as a ‘Limited Cost Trader’. If you have failed this test, the percentage you pay back to HMRC will change to 16.5%.

Unsure which scheme is right for you? Give us a call on 01252 704 030 or download our VAT guide.

 

What can be claimed under the VAT Flat Rate Scheme?

'Capital Goods' are goods used by your business that do not get used up except through normal wear and tear. With the FRS, you can reclaim the VAT that you've been charged for a single purchase on capital expenditure goods where the amount, including VAT, is £2000 or more (Providing its sole use is for business!).

For example, you may be able to reclaim the VAT on a vehicle purchase on a new car, so long as you only use it for business purposes. You must be able to show that it is isn't used for private use though. 

Private use refers to any journeys you make to and from work from home, unless of course at a temporary place of work. Because of this restriction, VAT often isn't reclaimed. You may be able to reclaim all of the VAT if it's mainly used as for: 

  • Taxis
  • Driving Instruction
  • Professional Driving - e.g. Couriers / Delivery Drivers

There are also some allowances for commercial vehicles, which mean you can usually reclaim the VAT. 

Commercials include, but aren't limited to things like vans, lorries, tractors, motorcycles and motor homes – so long as they're used solely for business purposes. 

If you'd like some help understanding what you can and can't reclaim, then contact us and we'll help you understand exactly what you can and can't do.  


When do I need to complete my VAT returns?

Once HMRC has approved your VAT application, they’ll let you know when your first VAT return is due. You’d usually submit your VAT return to HMRC every quarter – This is known as your ‘accounting period’. 

Your deadline for submitting your VAT return online and paying HMRC is usually the same: One calendar month and seven days after the accounting period. 

Remember, you’ll need to leave enough time for the payment to read HMRC’s account. 

 

Quarter Dates VAT Deadline

Q1 01 Jan to 31 Mar   =    31st Mar + 5 weeks

Q2 01 Apr – 30 Jun    =    30th Jun + 5 weeks

Q3 01 Jul – 30 Sep     =    30th Sep + 5 weeks

Q4 01 Oct – 31 Dec    =    31st Dec + 5 weeks

 

What is Making Tax Digital for VAT?

Making Tax Digital (MTD) is a government initiative to change the way UK businesses file their tax returns. 

HMRC aims to bring the entire tax system online in a bid to reduce the false reporting and to make it more difficult to make mistakes. 

The first phase of Making Tax Digital for tax launched in 2019 and is a compulsory measure. It means that you’ll need to submit your VAT returns through an approved piece of software.

You can read more about it here in our guide, ‘Everything you need to know about Making Tax Digital’


What is a VAT invoice and why does it matter?

You’ll need to keep a record of any VAT invoices when you submit your VAT return. It’s important that you know exactly what you’re looking for on a VAT invoice as you’ll be required to share some very specific information. 

You’ll need to make sure the invoice contains a number of specific details, which you read more about here


Can I reclaim the VAT I paid before my business was VAT registered?

You can reclaim the VAT you paid on goods that were bought before you became VAT registered up to four years before registration. You can also reclaim the VAT you paid on services up to six months before registration. 

In order to reclaim the VAT on the goods you purchased, they must be: 

  • Bought on behalf of the business entity that is VAT registered
  • Bought for the purposes of your business
  • Still held by you

 

There are a number of exceptions however and you can’t always claim back the VAT on certain goods.

These include: 

  • Goods that were used completely before you registered for VAT
  • Goods that you sold before you registered for VAT 
  • Goods that are VAT exempt

 

Important Note: The exemptions outlined above only apply to the Standard VAT accounting method. As the Flat Rate Scheme for VAT doesn’t take into account your expenses, this is not applicable. 

 

Why should I register for VAT?

Many sole traders choose voluntary registration for VAT before the hit the £85k threshold. You should think carefully before registering for VAT because it isn’t right for everybody and it’ll depend entirely on your personal circumstances. 

There are two main reasons that you might choose to become VAT registered: 

  • Building your reputation: By registering for VAT, you can help to give your business the appearance of being bigger than it is. Most contractors will be aware of the £85k threshold and if you aren’t VAT registered, they’ll know that your turnover is less than that, which may weaken your position when competing with other well-established businesses.

  • Reclaiming VAT: Whether you claim back VAT based on the VAT you’ve been charged by other businesses or you opt to use the Flat Rate Scheme for VAT, you may be entitled to a refund if the amount you’ve charged for VAT is less than what you’ve paid.  


Important considerations when registering for VAT

Although in many circumstances, voluntary VAT registration can be financially beneficial, it’s important to remember that VAT registration isn’t right for everybody. 

So that your business doesn’t miss out on valuable profit, you will more than likely need to add VAT to your prices. 

A lot of people are worried that it might mean that they lose out to competitors for work, but bear in mind that when you sell to a VAT-registered business, they’ll be able to claim the VAT back, so it shouldn’t matter. 



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