Sole Traders: VAT Registration and Smart Savings Explained

Do sole traders need to register for VAT? Can they choose to register for VAT? Whether they do or don't register for VAT, they should be making best use of a separate business savings account and Money Squirrel to automate saving for tax and a rainy day buffer. When it comes to VAT, sole traders in the UK face a few specific problems: 1. Mandatory Registration Threshold: If your turnover exceeds £90,000 in a 12-month period, you must register for VAT. This can be a hassle for small businesses that suddenly find themselves crossing this threshold. 2. Administrative Burden: VAT registration means more paperwork and administrative tasks. Sole traders often lack the resources to handle this efficiently. 3. Cash Flow Issues: Collecting VAT from customers and paying it to HMRC can affect cash flow, especially for sole traders who may already be juggling finances. 4. Limited Knowledge: Many sole traders lack in-depth knowledge of VAT rules, leading to mistakes and potential penalties. Recommendations to Address the Problems: 1. Stay Informed: Regularly monitor your turnover to avoid unexpected VAT registration. Use accounting software to keep track of your finances. 2. Simplify Administration: Consider using accounting software like FreeAgent, which is free with some business accounts, to manage VAT returns and other financial tasks. 3. Plan for Cash Flow: Set aside the VAT collected in a separate account to avoid cash flow issues when its time to pay HMRC. 4. Seek Professional Help: If you're unsure about VAT rules, consult an accountant or a VAT specialist. Suitable Banking Options: Here are some mobile banking apps that can help sole traders manage their finances more efficiently: 1. Revolut: Pros: Free account for sole traders, 247 customer support, multicurrency accounts. Cons: Deposits not protected by FSCS, no cheque or cash deposits, no physical branches, no overdraft or credit facilities. 2. Starling: Pros: No subscription cost, 247 support, fast payments, no monthly or transaction fees, highly reviewed. Cons: Some features are only available through the business toolkit, charges for cash deposits at post offices, no physical branches, no interest on business accounts. 3. Mettle by NatWest: Pros: No monthly charges, quick and easy application process, part of a trusted bank, free UK transactions and withdrawals, free accounting software. Cons: No physical branches, maximum balance limit, not protected by FSCS, no cheque deposits. Conclusion: Using banking apps like Revolut, Starling, and Mettle can help sole traders manage their finances more effectively. They offer various features that simplify banking and financial management, even if they come with some limitations. These apps are particularly suitable because they provide essential services without the need for physical branches and help streamline administrative tasks, allowing sole traders to focus more on their business. And then, link up your business accounts with Money Squirrel, and your VAT will be split for you on incoming transactions - automatically - creating a passive income while saving you extra grey hairs and hours of headaches.