As a Sole Trader, you may be wondering if you should register for vat or if it is required if your e-commerce business has a staff of one. Whether or not you are VAT registered can make a vast difference to your business and it’s a step that many business owners are reluctant to take. VAT registration applies to all, regardless of your entity size, and can be mandatory or voluntary.
VAT legislation doesn’t discriminate. If you are over the VAT threshold, you must be registered, whether you are a Sole Trader, partnership or a limited company. Additionally, you can always opt-in to pay the VAT before you hit this threshold, even as a Sole Trader. Register for VAT when you need to, or when you choose to, but always understand the criteria and your responsibilities.
What is VAT?
Value-added tax, or VAT, is charged on all taxable supplies between businesses. It must be paid on all transactions whether incoming or outgoing. As an e-commerce business, if you are VAT registered you must add VAT into your sales prices, and you will be able to reclaim VAT spent on business purchases such as stock and fixed assets.
Is it worth being VAT registered?
There’s a whole host of benefits that come hand in hand with being VAT registered including the following including better and increased cash flow. And, once you have registered for VAT, you can claim back your VAT costs, which can also make a huge difference to your cashflow.
With this in mind, if you are business that earns more than the £85,000 per year threshold, it is certainly worthwhile being VAT registered.
VAT rates vary but most e-commerce business transactions will come under standard VAT at a rate of 20% for domestic transactions and 20% or 0% for international transactions depending on the country you complete the transaction with. There is also a reduced rate of 5% for items such as children’s car seats.
Mandatory VAT registration
Mandatory VAT registration is the most common path and must be done if you have earnt more than £85,000 in the previous 12 months (figures correct for 21/22 tax year). This is not your business’ year-end but any 12-month period, so you will need to monitor this on an ongoing basis.
Additionally, if you haven’t crossed the threshold but are aware that you are going to in the next month, you are also required to register. Penalties can be imposed for delaying VAT registration so it is always best to register as soon as you discover you should.
When do you register for VAT as a Sole Trader?
If you’re a sole trader and your annual turnover from the previous 12 months amounts to more than £85,000, you will need to make sure that you register for VAT. This is also the case if you know that your turnover will exceed the £85,000 threshold within the next 30 days.
When should a sole trader register with HMRC?
As soon as you become self-employed, you should make it your first priority to register with HMRC and remember, the tax year runs from 6 April one year to 5 April the next.
Voluntary VAT registration
For any business, there is also the option to register for VAT voluntarily. We have discussed the advantages and disadvantages of this previously but the main positives are the illusion of size that it gives and being able to capitalise if you are about to make some sizeable purchases.
Regardless of your route to VAT registration, you will need to choose the right VAT scheme for your e-commerce business. If you register for VAT as a Sole Trader who register for VAT may wish to look at the flat rate scheme or cash accounting scheme as well as the standard and annual accounting schemes.
When you register for VAT as a Sole Trader, through either path you will now have obligations to file VAT returns, usually on a quarterly basis. Since 1st April 2019, under the Making Tax Digital initiative, this needs to be completed digitally, through an MTD-approved piece of software, such as Xero.
For all e-commerce Sole Traders who registers for VAT, it can be a minefield to correctly account for. E-commerce by its nature is a highly complex area for VAT, and mistakes can be costly. We highly recommend all e-commerce business owners have their VAT returns completed by an e-commerce accountant to ensure international taxes and MTD are correctly dealt with.
If you need help with your VAT returns or want further advice on voluntary VAT registration for your e-commerce business, please get in touch today.
The best time to act is now.
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