Suitability of Accounting Packages For Non Vat Registered Sole Traders

Value added tax is a tax on the final consumption of certain goods and services. Vat at the standard rate is added to the selling price of all goods and services which are neither exempt nor zero rated by businesses whose gross sales exceed the vat threshold limit.

The sole trader accounts package is suitable for self employed business that are not vat registered and whose sales are unlikely to reach the vat threshold during the financial year. If the vat threshold is likely to be exceeded during the tax year then the self employed accounting package would be more suitable as the self employed accounting spreadsheets can be easily adjusted to account for either non vat registered business or businesses that become vat registered during the financial year.

The vat threshold is the level of gross sales income at which a business becomes liable to pay vat out on all sales generated. Businesses that exceed the vat threshold are liable to pay vat on the gross sales at the standard rate (20% in 2013) unless the goods supplied are exempt or zero rated, regardless of whether the sole trader is registered for vat or not. The vat registration threshold is set each year in the March financial budget and was £77,000 for the financial year commencing April 2013.

When a business registers for vat that small business is then permitted to add vat output to the sales value and may also reclaim vat input on purchases against the tax liability.

Sole traders whose sales turnover reaches the vat threshold should register for vat unless sales turnover has been exceptional and not likely to be repeated on an ongoing basis. In those cases HMRC should be notified that while the vat threshold has been breached vat registration is not being proposed as the sales that caused the threshold limit to be exceeded were exceptional and unlikely to be repeated in future trading periods.

When a business is not registered for value added tax purposes no vat is added to the sales price. Goods bought from suppliers may include vat input and this tax is treated by the business as a cost. The total purchase price including value added tax being included in the bookkeeping records of expenses. The sole trader accounting spreadsheets do not include separate columns for vat inputs or outputs since neither are required.

Where business turnover is under the vat threshold vat registration with HMRC is not required although vat registration can be voluntarily below the threshold level. Where a business sells the majority of its goods and services to the general public it is usually advantageous not to register for value added tax until it cannot be avoided. Where a small business customers are registered for vat then it is often desirable from a financial standpoint to register voluntarily as sales are not affected by adding value added tax to the sales invoices and the vat input paid on purchase invoices can then be reclaimed against the additional vat income raised.

If the sole trader is certain that the business will not be registered for vat then the sole trader accounts package is suitable. Businesses that are not registered for vat do not need to keep vat records. A business that is registered for vat not only needs to keep vat records to support the quarterly vat return but must also maintain a value added tax audit trail to support the quarterly tax return should the accounting records be subject to a vat inspection by HMRC.

If the business is close to the vat threshold or may exceed the vat registration threshold limit during the financial year or voluntary vat registration is being considered then the self employed accounts would be more suitable as while the sole trader accounting spreadsheets are only suitable for non vat registered business the self employed accounting spreadsheets are designed to be suitable for both vat and non vat registered business.

Further guidance is available from the HMRC website value added tax portal at:

Introduction to VAT This is a summary of the most common value added tax issues and a good place to start finding out how it affects you and your business.

HMCE have a number of schemes available to make calculating and paying vat easier details of which can be found at: Choose the right VAT scheme for your business

Registering for VAT Registering for VAT is compulsory for some companies and voluntary for others. Find out how your business fits the bill and how to get registered.

Businesses can register for vat online at: VAT Online Registration Service
Brief descriptions of the full range of Accounting Software, Payroll Software, Company Formation are available on the DIY Accounting home page

"Self employed sole traders accounting spreadsheets under the vat threshold limit with a non vat registered business for value added tax"