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When starting up as a sole trader, the concept of VAT is one that should be uppermost in your thoughts. This guide should tell you what you need to know.

Basically, if, at the end of any month, your annual turnover exceeds £61,000 in the previous 12 months or less you are required to register for VAT. You can voluntarily register for VAT if the turnover is less than the threshold.


The question of being a sole trader or limited company is a matter of fact. If your trade as a sole trader (for example A. Smith or Arthur Smith) the VAT registration will be in that name. If you have formed a limited company (Arthur Smith Limited) the VAT registration will be in that name.

Two Public Notices which offer relevant advice are:
Notice 700 – VAT General Guide
Notice 700/1 - Should I be registered for VAT?
Notice 700/15 - The ins and outs of VAT
These can be located here

The VAT advice line will help with queries on 0845 010 9000
The relevant form is an Application for Registration - VAT 1
You can download these from the internet here

If you have any doubts you should talk to your accountant who will explain the requirements in greater detail and help with specific queries or even complete the VAT return on your behalf.

This means that once registered you will be given a unique VAT number relevant to only your business. You will be required to charge VAT usually at the standard rate of 17.5 per cent on your sales invoices, so that for example if your invoice value is £1,000 you will add £175 and the customer is required to pay you £1,175. Every quarter you will complete a VAT return showing how much you have collected in VAT (all the £175s in the above example, called Output Tax) and how much VAT you have paid to your suppliers (called Input Tax) and you will be required to pay over the difference, assuming that that the Output Tax exceeds the Input Tax.

See also: PAYE for sole traders

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4 comments

Tom Murray

Hi, I work as a sole trader and have one contract with one employer. The company I work for raise the invoice for me on a weekly basis. The work involves delivering early morning newspapers, they supply the goods for me to deliver and I provide the vehicle. The questions I have are; are they allowed to charge me for any errors that I may make? They do this without any notice and there isn't anything in my contract to say that penalties apply, only a memo letter has been given. Are there any other benefits such as holiday pay that I may be entitled to have?

David Hurst

Hi, I have a company trading as a sole trader importing tiles so I registered for VAT ( I was way under the threshold but would save paying VAT on my purchases and transport costs) I now want to work restoring tiles in private addresses but do not want to have to add VAT for my unregistered customers. I registered my company name as a dormant LTD company mainly to protect the trading name. My question is could I register/transfer my VAT status to the LTD company and operate as a sole trader to restore the tiles without adding VAT?? Thank you in advance

Shams Ali

Hi Peter, Purchase: Net £24.00 VAT £4.80 Gross £28.80 Sale: Net £35.82 VAT £7.17 Gross £42.99 Exclude VAT for profit calculation. 35.82-24= 11.82 VAT Return. You get your Input back. Your collecting vat on behalf of the government. Input: 4.80 Output: 7.17 Pay HMRC (7.17-4.80)= 2.37 If you understood and liked the way I broke it down feel free to contact myself. KR Shams Elm Tree Accountants

Peter Bowyer

Hi there, just a quick question, I'm hoping to start up as a sole trader very soon, and have read your article about how much tax I pay as a sole trader. Example I buy a product for 24.00 from a supplier, he then charges vat/tax at 20% = 4.80 = 28.80 the recommended retail price is 42.99 I assume that I had 20% vat/tax to 28.80 = 5.76 = 34.56 profit before cost would therefore be 8.43 Is this correct, or am I missing something here?

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