How to Do a VAT Return: A Simple Guide

What is VAT?

VAT or value-added tax is a tax charged on the sale of goods and services. Businesses collect VAT from customers on behalf of HMRC and can reclaim VAT paid on business-related purchases. There are three main VAT rates in the UK:

• Standard rate (20%): Applies to most goods and services.
• Reduced rate (5%): Applies to certain items like home energy and children’s car seats.
• Zero rate (0%): Applies to most food, children’s clothes, and books.

Who Needs to Register for VAT in the UK?

Businesses must register for VAT if their taxable turnover exceeds £85,000 within a 12-month period. Voluntary registration is also possible for businesses below this threshold, which can be beneficial for reclaiming VAT on purchases. Registration can be done online through HMRC.

When to Submit a VAT Return

VAT Return Deadlines

VAT returns are typically submitted quarterly, depending on your accounting period. You must submit your VAT return and make any payment due within one month and seven days after the end of your accounting period. HMRC will specify your deadlines once you’re registered.

Penalties for Late Submissions

Failing to submit your VAT return or pay on time can lead to penalties and interest charges. Penalties are based on the number of defaults and the time taken to submit the return. Repeated late submissions can lead to increased surcharges, so it’s important to stay on top of deadlines.

How to Do a VAT Return Step by Step?

1. Collect Necessary Records

Before you begin your VAT return, gather all necessary documentation:

• VAT invoices for all sales and purchases.
• Records of goods and services sold and bought.
• Documentation for dealings with VAT-registered suppliers in EU member states.
• Export and import documentation if applicable.
• Business bank statements and receipts.

Keeping accurate records ensures you can correctly calculate the VAT you owe or can reclaim.

2. Calculate VAT Owed or Reclaimable

To calculate your VAT liability:

• Output VAT: Total VAT charged to customers on sales.
• Input VAT: Total VAT paid on business-related purchases.

Subtract your input VAT from your output VAT to determine the amount of VAT you owe or can reclaim. If your input VAT is higher, you can reclaim VAT from HMRC.

3. Submit via HMRC’s Making Tax Digital (MTD) System

Businesses over the VAT threshold must use Making Tax Digital (MTD)-compatible software to complete and submit their VAT returns. Steps include:

• Logging into your VAT online account via the HMRC portal.
• Using approved accounting software to fill out the VAT return.
• Reviewing the information carefully and clicking submit your VAT return.

HMRC will confirm receipt, and if you owe VAT, payment must be made by the deadline.

Common VAT Mistakes to Avoid

1. Incorrect VAT Rates

Using the wrong VAT rate can lead to underpayment or overpayment. Always verify the correct VAT rate for your goods and services.

2. Missing Deadlines

Late submissions can result in surcharges and interest penalties. Set calendar reminders and use accounting software to stay on schedule.

3. Incomplete Records

Incomplete or inaccurate records can cause calculation errors. Maintain detailed and organised records of all transactions, including VAT invoices and receipts.

4. Not Claiming Eligible VAT

Failing to reclaim VAT on eligible business expenses can cost your business money. Review all expenses carefully to ensure you’re reclaiming all allowable VAT.

Tips for a Smooth VAT Return Process

1. Use Accounting Software

Using Making Tax Digital-compatible accounting software simplifies the VAT return process. Software like QuickBooks and Xero helps:

• Automate VAT calculations.
• Track sales and purchases.
• Ensure compliance with HMRC requirements.

2. Keep Accurate Records

Organise and store your VAT records properly. This includes sales and purchase invoices, receipts, and bank statements. HMRC requires you to keep VAT records for at least six years.

3. Set Reminders

Set reminders for key dates, including VAT return deadlines, payment dates, and record-keeping checks.

Read More: Can I Claim VAT Back as a Sole Trader?