When do you pay VAT as self-employed?

Value-added tax (or VAT for short) is a levy businesses charge on products or services on behalf of HM Revenue & Customs (HMRC). 

Therefore, it’s a tax you collect and then pass on, not an income stream that benefits your self-employed business. 

It’s crucial to understand how VAT works because it impacts how much you charge your customers and what you pay in expenses.

One of the areas of confusion for many self-employed people is that VAT rates differ, so you won’t charge a universal tax rate on everything you supply. Likewise, you aren’t always obliged to charge VAT depending on your total income.

Don’t worry; we’ll explain all of these complexities!

This guide will help you learn how to file VAT returns confidently (and why advanced bookkeeping software is the key to seamless VAT management). 

Read on, or skip to the applicable section to answer any queries you need answering:

1. When do you pay VAT over to HMRC?
2. How and when should I register for VAT?
3. What does VAT qualifying mean?
4. What’s the difference between VAT margin and VAT qualifying?

As we’ve mentioned, VAT isn’t a direct business tax. In effect, you add the applicable tax rate to your prices and then keep back the VAT you’ve collected for HMRC.

It works the other way too, so if you are self-employed and VAT registered, you need to keep records reflecting every penny of VAT you have paid to your suppliers. 

When it’s time to file your VAT return, you deduct the tax you’ve paid (output VAT) from the tax collected (input VAT) and owe the balance to HMRC.

The next point to cover, especially if you’re wondering when do you pay VAT, is that you aren’t necessarily required to account for VAT at all. 

If your turnover is £85,000 a year or more, then you are obliged to register and charge the applicable VAT rate on any services or goods you sell.

It’s a common misconception that self-employed people aren’t subject to this VAT threshold rule, which is untrue. 

You can run through the VAT registration process online through the HMRC website.

The same threshold applies to all businesses, if:

• Your turnover was £85,000 or above in the last year.
• You expect to tip over that £85,000 cap in the next 30 days.

Note that it’s essential to register if you fall into this category. Late registration usually means backdating VAT owed – simple if you bank with CountingUp, not so much if you keep manual accounts.

The UK standard VAT rate is 20%, which applies to most businesses, goods and services. However, there are a few categories with different treatments:

• Reduced rate VAT is 5% and applies to essential home energy supplies and safety equipment such as kid’s car seats.
• Zero rate VAT is 0%. This category differs from VAT exempt goods, as HMRC reserves the right to increase the rate. Currently, zero-rated products include things like essential food, newspapers, footwear, water and children’s clothing.
• VAT exempt goods or services aren’t subject to tax on either sales or purchases. Examples include charitable sales, some medical supplies, admission charges for cultural or philanthropic organisations and gambling.

If you’re unsure, it’s well worth checking up on current VAT rates since these can and do change. 

At the time of writing, hospitality services and accommodation are subject to a reduced VAT rate to support businesses in this sector, coping with the financial fallout of the pandemic.

Another more straightforward solution is to register for a CountingUp account and have your VAT calculated for you – a huge time saver if you’re issuing invoices and need to charge different sales tax rates!

Now, if you don’t need to register for VAT, it’s worth looking at how much output VAT you pay on things like raw materials, running costs and general overheads.

If your output VAT is more than your input VAT, you can claim the difference back from HMRC just as you pay the difference if it’s the other way around.

VAT works both ways, so if you spend more paying supplier VAT than you charge customers, it might be in your favour to register, which you can do voluntarily even if you don’t meet the mandatory threshold! 

Check out our guide, What is VAT, for more information about reclaiming VAT.

This tax is paid quarterly, so it covers a three-month period in each return. 

Most sole traders will have one month and seven days to compile their VAT returns and submit either a payment or claim for reimbursement.

For example, if your VAT period starts on 1st April, you’ll collate the values paid and collected from then until 30th June. The return (and any associated payments) falls due on 7th August.

VAT qualifying is a term you’ll often hear associated with buying a business vehicle. The classification means that VAT is payable, but you can reclaim the VAT proportion of your purchase.

For example, if you buy a car for £10,000 in total, you can reclaim £1,666.66 in sales tax on your next VAT return (i.e. 20% of the cost).

If you sell that same car for, say, £12,000, the same 20% value would be VAT (£2,000), so you’d need to declare that as input VAT and pay it over to HMRC. 

As a business, you’d have paid £8,333 and earned £10,000, with the differences being the applicable sales tax. 

To be VAT qualifying, a car needs to meet a few specific requirements, such as being intended for passenger transport.

So, what does VAT qualifying mean for personal vehicles? In short, nothing – you are registered for VAT as a business, not as a private individual, so you cannot reclaim output VAT on a car bought for personal use.

Car auctions will feature both VAT margin lots and VAT qualifying cars – and it pays to know the difference!

VAT qualifying means that VAT must be added to the sale price, so you’ll need to add on that 20% to your total cost (or check if the listing value is inclusive).

You can usually find the breakdown of the net cost and VAT element on the sales invoice, so you have supporting paperwork to claim the tax back against.

VAT margin can apply in a few scenarios. It’s worth deep diving into this a little since buying a car for a self-employed business might be one of the most significant purchases you make!

A car marked as a ‘Margin Vehicle’ has been purchased, with the relevant sales tax added, but that VAT hasn’t been reclaimed from HMRC.

That means that if it’s sold again (or resold by the buyer), it isn’t subject to VAT.  HMRC has already received the sales tax without a corresponding output tax claim and won’t expect the vehicle to be subject to a second VAT charge.

You might also see auction lots listed as ‘non VAT qualifying vehicles’. Technically, they are a product that is VATable, but this specific car isn’t subject to sales tax on the next transaction.

If you’d like more information about VAT on self-employed vehicle purchases, we’d recommend visiting the HMRC pages for additional guidance.

We recognise that sales tax can seem like a complex area, as you need to know what rate of VAT to charge, how much VAT you’ve paid, and pay or reclaim the difference every quarter.

The reality is that for many self-employed traders, this additional bookkeeping task requires diligent oversight and time pressures that aren’t compatible with running a busy business.

A CountingUp business current account solves all these challenges in one swoop, with built-in accounting software that takes the strain out of VAT accounting and frees up your time to concentrate on running your business.

As Making Tax Digital becomes imminent, now is a better time than ever to switch up to an innovative bookkeeping solution, allowing you to instantly review your profits, manage cash flow, estimate your taxes and file painless VAT returns.

Download the CountingUp app today, and discover a new way to keep your finances running like clockwork.