Can Sole Traders Claim Back VAT

Introduction

At Towerstone, we provide accountancy services in Bedford to local sole traders, landlords, and limited companies. We have written an article about Can Sole Traders Claim Back VAT to help you understand when VAT can be reclaimed, what registration status matters, and common pitfalls.

This is one of the most common VAT questions I get from sole traders and for good reason. VAT can feel confusing at the best of times and when you are running a business on your own it is easy to assume VAT only applies to limited companies or larger firms. In my experience many sole traders either miss out on VAT reclaims they are entitled to or worry they are doing something wrong when they are not.

The short answer is yes, sole traders can claim back VAT, but only in specific circumstances and only if certain conditions are met. Whether you can reclaim VAT depends on your VAT registration status, the type of expenses you incur, and how those costs relate to your business.

In this article I will explain exactly how VAT works for sole traders, who can reclaim VAT and who cannot, how the reclaim process works in practice, and the common mistakes I see year after year. I will also cover pre registration VAT, real world examples, and practical advice to help you stay compliant while not paying more tax than necessary.

What VAT is and how it applies to sole traders

VAT, or Value Added Tax, is a consumption tax charged on most goods and services in the UK. Businesses act as collectors of VAT on behalf of HMRC. You charge VAT on your sales if you are registered and you may reclaim VAT on eligible purchases.

A sole trader is not a separate legal entity from the individual, but for VAT purposes sole traders are treated in the same way as any other business. There is no distinction in the VAT rules between a sole trader and a limited company.

What matters is not your business structure but whether you are VAT registered and what you are buying and selling.

Do sole traders have to be VAT registered?

Not all sole traders need to register for VAT.

You must register for VAT if your taxable turnover exceeds the VAT registration threshold in any rolling 12 month period. The current threshold is £85,000. Taxable turnover includes sales that are standard rated or zero rated. It does not include VAT exempt income.

You can also choose to register voluntarily even if your turnover is below the threshold.

This distinction is critical because VAT can only be reclaimed if you are VAT registered.

Can a sole trader reclaim VAT if they are not VAT registered?

No. This is one of the most important points to understand.

If you are not VAT registered you cannot reclaim VAT on your expenses. The VAT you pay simply becomes part of the cost to your business.

I often see sole traders assuming they can claim VAT back through their Self Assessment tax return. That is not how VAT works. Income tax and VAT are completely separate systems.

If you are not VAT registered, the VAT on your purchases is not recoverable regardless of how legitimate the business expense is.

When a sole trader can reclaim VAT

A sole trader can reclaim VAT if all of the following apply:

You are VAT registered
The goods or services were purchased for business purposes
The supplier charged VAT correctly
You hold a valid VAT invoice
The cost relates to taxable supplies

If any one of these conditions is not met, VAT recovery may be restricted or disallowed.

What expenses a sole trader can usually reclaim VAT on

Once registered, a sole trader can generally reclaim VAT on most business related expenses.

Common examples include:

Office supplies and stationery
Tools and equipment
Business use of mobile phones
Software and subscriptions
Professional fees such as accountants and solicitors
Marketing and advertising costs
Fuel and vehicle expenses subject to rules
Rent of commercial premises
Utilities for business premises

The key test is whether the expense is used for business purposes and whether VAT was actually charged.

Expenses where VAT reclaim is restricted or blocked

Not all VAT can be reclaimed even if you are registered.

From experience these are the areas that cause the most confusion.

Entertaining

VAT on business entertaining of clients is not reclaimable. This includes meals drinks and hospitality.

VAT on staff entertaining may be reclaimable in limited circumstances.

Motor cars

VAT on the purchase of cars is usually blocked unless the vehicle is used exclusively for business with no private use. This is rare in practice.

VAT on car leasing is usually 50 percent recoverable if there is private use.

Mixed use expenses

If an expense is partly personal and partly business, VAT can only be reclaimed on the business proportion.

This commonly applies to:

Mobile phones
Home broadband
Utilities
Vehicles

Your accountant will usually help calculate a reasonable business use percentage.

Exempt supplies

If your business makes VAT exempt supplies, such as certain financial or property services, VAT recovery may be restricted under partial exemption rules.

This is an area where professional advice is essential.

How VAT reclaim works in practice

VAT is reclaimed through your VAT return.

On each return you declare:

Output VAT charged to customers
Input VAT paid on expenses

If your input VAT exceeds your output VAT, HMRC will refund the difference. If output VAT is higher, you pay the balance to HMRC.

For most sole traders VAT returns are submitted quarterly under Making Tax Digital rules using compatible software.

Claiming VAT on expenses incurred before VAT registration

This is one of the most valuable and often overlooked areas.

Sole traders can reclaim VAT on certain expenses incurred before they registered for VAT.

The rules are:

Goods purchased up to four years before registration can be reclaimed if they are still in use
Services purchased up to six months before registration can be reclaimed

The goods or services must have been bought for business purposes and you must hold valid VAT invoices.

From experience this can lead to significant refunds when a business registers for VAT later than expected.

Common examples include equipment tools computers and software subscriptions.

Real world example of pre registration VAT reclaim

I worked with a sole trader who registered for VAT after exceeding the threshold. They had purchased equipment and software in the years leading up to registration.

By reviewing invoices carefully we were able to reclaim several thousand pounds of VAT on their first return. Without advice they would never have known this was possible.

VAT schemes and how they affect reclaim

The VAT scheme you use affects how and what you reclaim.

Standard VAT scheme

Under the standard scheme you reclaim VAT on actual expenses and charge VAT on sales in the usual way.

This provides the most accurate recovery but requires good record keeping.

Flat Rate Scheme

Under the Flat Rate Scheme you usually cannot reclaim VAT on most expenses. Instead you pay a fixed percentage of your gross turnover to HMRC.

You can still reclaim VAT on certain capital assets costing over £2,000 including VAT.

From experience many sole traders join the Flat Rate Scheme without understanding the limitations on VAT reclaim. This can be costly.

Cash Accounting Scheme

This scheme affects timing rather than entitlement. You reclaim VAT when you pay suppliers rather than when invoices are dated.

This can help cash flow but does not change what VAT is reclaimable.

Common mistakes sole traders make with VAT reclaim

I see the same issues repeatedly.

Trying to reclaim VAT without being registered
Reclaiming VAT without valid invoices
Reclaiming VAT on personal expenses
Claiming VAT on client entertaining
Using the wrong VAT scheme
Missing pre registration VAT claims
Over reclaiming VAT on vehicles

These mistakes can lead to penalties interest and HMRC enquiries.

VAT invoices and record keeping

To reclaim VAT you must hold a valid VAT invoice.

A valid invoice must include:

Supplier name and address
Supplier VAT number
Invoice date
Description of goods or services
Net amount VAT amount and gross total

Simplified invoices can be used for small amounts but still need key details.

Digital copies are acceptable and encouraged under Making Tax Digital.

VAT and home based sole traders

Home based sole traders often struggle with VAT.

You can reclaim VAT on the business portion of home costs such as:

Electricity and gas
Broadband
Telephone

The reclaim must be apportioned fairly based on business use.

From experience HMRC is comfortable with reasonable methods as long as they are consistent and documented.

VAT and mileage versus actual costs

If you use the simplified mileage method for income tax, VAT reclaim works differently.

You can reclaim VAT on the fuel element of mileage but not on the full mileage rate.

If you use actual vehicle costs, VAT recovery depends on the type of vehicle and usage.

This is a complex area and one where mistakes are common.

Voluntary VAT registration and reclaim

Some sole traders choose to register for VAT voluntarily to reclaim VAT on costs.

This can make sense if:

You have high VATable expenses
Your customers are VAT registered and can reclaim VAT
You want to reclaim pre registration VAT

However voluntary registration also means charging VAT on sales and complying with VAT rules.

From experience this decision should be made carefully with advice.

VAT reclaims and HMRC checks

HMRC can and does check VAT reclaims.

Large or unusual refunds may trigger reviews.

Good record keeping and conservative claims reduce risk.

An accountant helps ensure claims are defensible and properly supported.

How an accountant helps sole traders with VAT reclaim

VAT is one of the areas where professional advice adds real value.

An accountant can:

Confirm whether you should register
Choose the right VAT scheme
Maximise legitimate VAT reclaims
Handle pre registration VAT
Ensure compliance with Making Tax Digital
Reduce HMRC enquiry risk

In my experience VAT errors cost far more than accountancy fees.

Practical advice from experience

If you are a sole trader wondering about VAT reclaim, I suggest the following:

Confirm your VAT registration status
Review your expenses and invoices
Do not assume VAT can be reclaimed
Check pre registration costs
Choose your VAT scheme carefully
Keep clear digital records
Ask for advice before submitting returns

VAT is unforgiving of assumptions.

Cost versus benefit of VAT reclaim

Reclaiming VAT improves cash flow and reduces costs, but only when done correctly.

Over claiming can lead to penalties and stress.

Under claiming means leaving money with HMRC unnecessarily.

The right balance is accuracy and consistency.

The key takeaway

Sole traders can absolutely reclaim VAT, but only if they are VAT registered and only on eligible expenses. VAT is not about your business structure. It is about registration status and compliance.

From my experience the biggest issue is not that VAT rules are unclear. It is that people mix VAT and income tax together and assume one affects the other.

If you take one thing away from this article it should be this. VAT reclaim is a separate system with its own rules and those rules must be followed precisely.

Handled properly VAT reclaim can be a genuine benefit to sole traders. Handled casually it can become a problem. Knowing the difference is where good advice really pays for itself.

If you would like to explore related guidance, you can visit our Bedford Accounting Hub, which brings together practical advice for Bedford clients.