What is a VAT Return?
A VAT return is the form VAT-registered businesses or individuals fill in to inform HM Revenue and Customs (HMRC) how much VAT they have charged other businesses or end-consumers and how much they’ve paid to other businesses. All VAT records and submissions of the form must normally be in a Making Tax Digital (MTD)-recognised digital format. Most businesses are required to file a return four times a year. The VAT form will show the amount of VAT the business or individual owes HMRC, or, conversely, the amount that is owed them.
VAT registration is mandatory for businesses if their VAT-taxable turnover is more than £90,000. Some businesses and individuals volunteer to register even if their turnover falls below the threshold. This can be done to enhance their reputation or improve their cash flow by reclaiming VAT on purchases.
Although registering for VAT can increase administrative and accounting/bookkeeping expenses, they are normally fully tax deductible (provided they relate wholly and exclusively to running the business).
Importance of submitting a VAT Return
Once registered, businesses are legally required to charge VAT on their sales (VAT output tax) and reclaim VAT on their business-related purchases (VAT input tax). As of April 1, 2022, all VAT-registered businesses or individuals must make VAT electronic submissions and pay what they owe electronically to comply with Making Tax Digital for VAT (MTD VAT).
It is vital that your VAT return is accurate and filed on time (normally four times a year). Inaccurate or late returns can result in penalties, fines and even a prison sentence. By completing the form correctly and submitting it on time, you can avoid unwelcome surcharges from HMRC. See more information about filing a VAT Return at https://www.gov.uk/vat-returns.
Step-by-Step Guide to Completing Your VAT Return
Preparing your documents
Organisation is the key to avoiding leaving anything out and making errors on your VAT return. All your financial records relevant to your VAT return should be easily accessible in your digital records.
Legally, you must keep digital records of the following records:
- The VAT on goods and services you supply (supplies made);
- The VAT on goods and services you receive (supplies received);
- The “time of supply” and “value of supply” (value excl. VAT) for everything you buy and sell;
- Any adjustments you make to a return;
- Reverse charge transactions (records of VAT on both the sale price and the purchase price of goods and services you buy);
- Any VAT accounting schemes you use;
- Your total daily gross takings if you use a retail scheme;
- Items you can reclaim VAT on if you use the Flat Rate Scheme;
- Your total sales and the VAT on sales if you trade in gold and use the Gold Accounting Scheme.
You must also keep digital copies of documents that cover multiple transactions made on behalf of your business by volunteers (charity fundraising), a third-party business, and employees’ petty cash expenses.
Remember to stay up-to-date with the new HMRC VAT guidelines, such as VAT rates. Since there is no defence in law for “ignorance”, you are obliged to know the rules and use them as you fill out your VAT return.
Understanding the VAT Return boxes
Here’s what each box means in brief:
Box 1: VAT due on sales and other outputs (output VAT)
The output VAT box should include the total amount of VAT you have charged on all goods and services during the return period.
Box 2: VAT due on the acquisition of goods
Complete this box for goods acquired in Northern Ireland from EU member states, but only in relation to the VAT Return period in question.
Box 3: Total VAT due
In Box 3, add together the figures from Box 1 and Box 2 to come to the “VAT due” figure for the return period.
Box 4: VAT reclaimed in the period (“input VAT”)
An important rule applies here: VAT is only recoverable on purchases with a valid VAT invoice (or other verifiable commercial documentation).
Box 5: Net VAT to pay or reclaim from HMRC
Taking the figures from Box 3 and Box 4, you should deduct the smaller figure from the larger one and put the difference in Box 5. If the figure in Box 3 is greater than that in Box 4, this is the VAT you need to pay to HMRC. If the amount in Box 3 is less than the amount in Box 4, this is the VAT you can reclaim from HMRC.
Box 6: Total value of sales and other outputs
Enter the total value (excl. VAT) of sales and other outputs made during the return period in this box.
Box 7: Total value of purchases and other inputs
Enter the total value of purchases and other inputs made during the return period (excl. VAT) in this box.
Box 8: Supplies of goods (incl. related costs) from Northern Ireland to EU member states
Only complete this box if you dispatch supplies of goods from Northern Ireland to EU member states. You must include the value of these sales (excl. VAT) and any related costs. The value in Box 8 must correspond with the figure given in Box 6.
Box 9: Acquisition of goods (incl. related costs) from EU member states to Northern Ireland
Only complete Box 9 if you acquire goods destined for Northern Ireland from EU member states. You must include the value of these acquisitions (excl. VAT) and any related costs. The value in this box must correspond with the figure given in Box 7.
Calculating input & output tax
Input VAT is the VAT on goods and services a VAT registered business purchases. To calculate input VAT, you add up the total amount of VAT on purchases your business has made during the period. The purchases must be relevant to the provision of onward taxable supplies.
Example: Assume that the standard VAT rate of 20% applies to all purchased items. The purchases are valued at £20,000. Therefore, in this example, the input VAT total is £4,000.
Output VAT is the VAT added to goods and services sold by a VAT-registered business to its customers, including other businesses and end consumers.
Example: In the same VAT period, your business sold goods with a value of £50,000 (excl. VAT rate of 20%). Therefore, in this example, the output VAT total is £10,000.
Taking these two examples, you will deduct the lower figure (input tax) from the higher one (output tax) to work out how much VAT you need to pay HMRC for that period. So, based on this example (£10,000 (-) £4.000 = £6,000), you owe HMRC £6,000.
If the VAT on your business’s purchases is greater than the VAT charged on sales, this will be what you can reclaim from HMRC via your VAT return.
Methods of VAT Return Submission
Online submission via the HMRC Portal
Ideally, business should register for VAT online via the HMRC website. There are circumstances where a business may register using the VAT1 form. Once you have registered for VAT and received your VAT registration number, you will need to create a VAT account through the Government Gateway to be able to submit your quarterly VAT returns online. Note that HMRC’s MTD for VAT automatically enrols all VAT-registered businesses unless they are already exempt or have applied for an exemption.
An alternative VAT return submission method is to use accounting software that is compatible with HMRC’s systems.
Using cloud accounting software for VAT Returns
You are legally obliged to keep VAT records and submit your VAT returns to HMRC using bookkeeping and accounting software that is compatible with MTD for VAT. If you prefer, you can submit your VAT return using your chosen compatible software rather than the HMRC VAT portal. It must be either:
- a compatible software package that allows you to keep digital records and submit VAT returns; or
- a bridging software to connect non-compatible software (like spreadsheets) to HMRC systems.
Common Mistakes & How to Avoid Them
Frequent errors in VAT calculations
Three common errors in VAT returns and calculations are related to vehicles, fuel, and entertainment:
1. VAT on motor vehicles (cars, motorbikes, vans, etc.)
You should not try to claim the input tax on motor vehicles unless you can prove that it is “not available” for private use (opposed to “not used for private purpose”). The same rule restricts the input tax on vehicle leases to 50% of all lease payments. For VAT purposes, however, a vehicle with a payload of over a ton is classified as a commercial vehicle
2. VAT on fuel
To reclaim fuel input tax, it must have been used wholly and exclusively for the purposes of running the business. You must keep detailed mileage records or apply the scale charge to the output tax (assuming there is some private use for the fuel purchased). The chosen method must be applied across all the company’s vehicles. This means that the scale charge will also apply to commercial vehicle fuel. You will be asked to submit fuel receipts to support the VAT amount you hope to recover from HMRC.
3. VAT on entertainment
HMRC strictly enforces its rules on recovering input tax on all business entertainment (apart from staff entertainment). No input tax on entertainment that is not for the business’s staff is recoverable. Taking a client to lunch is only business entertainment when certain conditions are met. If you go to the link just provided, you will see that “corporate hospitality events” are unlikely to be eligible for VAT reclaim.
There are numerous other common errors associated with VAT. You must stay abreast of the rules if you’re looking after your own VAT administration.
Ensuring accurate information
The fines, penalties, interest, and other punitive measures that HMRC can inflict for providing inaccurate information on a VAT return should keep you focused on accuracy.
The positive news is that, if you are reluctant to hire an accountant to look after all your VAT administration, there are various bookkeeping and accounting software packages that may help you improve accuracy and achieve VAT electronic submission via the VAT online service. That said, despite the sophistication of these cloud solutions, they cannot replace the benefits that come with having a qualified accountant look after your VAT returns. With their expertise and cloud-based accounting software, your days of worrying about penalties for inaccurate or late VAT returns are over.
An online accounting practice that provides accounting software free with all of its services could offer a solution. This is a failsafe way to ensure accuracy. And remember, your bookkeeping and accounting fees are 100% tax deductible.
VAT Return Deadlines & Penalties
Key submission deadlines
Typically, your VAT return will cover a period of three months. The deadline for submitting your VAT return and paying whatever you owe is usually one calendar month and seven days after the end of your VAT “accounting period”.
Consequences of late or incorrect submissions
Inaccurate or late VAT returns can attract penalties, fines, and even a prison sentence. Repeated inaccuracies or late filings can earn you “penalty points”, putting you on the tax authority’s radar.
At all costs, avoid late or incorrect VAT return submissions. HMRC will charge interest on any VAT not paid by the accounting period’s deadline. There are different rates for underpaid and overpaid VAT. Visit https://www.gov.uk/submit-vat-return/interest-underpaid-overpaid-vat to learn more about the rules.
Tools & Resources for Efficient VAT Management
Recommended accounting software & helpful resources and links
See the list of software that HRMC has verified as compatible with MTD for VAT: https://www.gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-vat.
See also the “Best MTD Software of 2024” published by Techradar. Here, QuickBooks, Xero, and FreshBooks are in the top three for the best cloud-based MTD accounting software.
However, online bookkeeping and accounting firms provide other excellent MTD-compatible software products as part of their packages. This is why doing your research before you commit is so essential. You should not feel that the only solution open to you is self-administering the VAT return process.
Industry-Specific VAT Return Considerations
VAT in different business sectors & special VAT Schemes
The numerous VAT schemes are, according to HMRC, “designed to simplify the way some VAT-registered businesses calculate and account for VAT to HMRC.”
Among the available VAT schemes are those that depend on your type of business and VAT-taxable turnover. For instance, for businesses whose VAT taxable turnover is £1.35 million or less, the VAT Annual Accounting Scheme (where you only need to complete one VAT return each year instead of four) might be an option. There is also the VAT Cash Accounting Scheme (where you pay VAT to HMRC when your customer pays you rather than when you invoice your customers).
The VAT Margin Scheme might interest retail or second-hand goods businesses. Here, VAT is paid on the value added to the goods you sell rather than on the full selling price of each item. This is only one of the three possible VAT retail schemes where VAT is calculated once with each VAT Return rather than calculating it for each sale made.
The HMRC website offers a full list of VAT schemes, some of which are designed to be used in combination. That’s why VAT is an area where the expertise of an accountant can pay dividends. It’s highly advisable to take some advice from an accountant before jumping into any of them.
Expert tips for streamlining your VAT process
Best Practices from VAT Experts: Four Tips for Staying Compliant
1. You must understand the rules and regulations and stay up-to-date with the most recent guidance notes and legislation. We highly recommend subscribing to HMRC’s email updates and registering for HMRC webinars.
2. You must also be able to rely on seamless integration of your bank statements with your invoicing and VAT accounts. You should do your research before you select a software product, bookkeeper/accountant, or a hybrid package.
3. Seeking expert advice on VAT planning, minimising VAT liabilities, and streamlining the process while remaining compliant is something we recommend. VAT is a highly complex area for the untrained to negotiate.
4. An expert accountant, cloud-based accounting and bookkeeping software, and a mobile app all work perfectly together to manage VAT. This is the only way to stay 100% certain and 100% compliant.
Updates and Changes in VAT Legislation
Recent changes in VAT laws & how future changes may affect your VAT Returns
Where would you like to start? The changes can come thick and fast, so just as you start to believe you’re on top of the rules, a new notice will appear from HMRC. This is why signing up for email updates with HMRC is recommended.
1. The VAT-registration threshold changed on 1 April 2024 (from £85,000 to £90,000), which is something hopefully every business took note of.
2. The announcement on 29 July 2024 stated that Standard Rate VAT will apply to independent school fees invoiced or paid on or after 29 July 2024 for school terms after 1 January 2025.
3. On 19 August 2024, the VAT One Stop Shop (OSS) scheme launched with the aim to simplify VAT for businesses. The VAT One Stop Shop (OSS) Union scheme aims to help businesses manage the VAT on their distance sales of goods from Northern Ireland to the EU all in one place.
4. From 1 January 2025, the rule changes on place of supply will affect UK VAT. This means that a UK business might not have to pay VAT if it’s due in the UK, but it might have to pay VAT in the EU country where the supply is made. As HMRC points out, “deciding the place of supply can be complicated”, hence UK-based VAT-registered businesses should pay attention.
5. In 2028, broader e-invoicing and digital reporting requirements will come into effect, which will likely have an impact on how you manage your VAT administration.
Conclusion
Taking a VAT “health check” to make sure your business’s records are in order and that you’re using the most appropriate scheme could be the best way forward. An accountant will make sure your business is taking advantage of everything VAT registration can offer, such as benefiting from the VAT reclaim process. They will ensure that penalties for late VAT returns or inaccuracies are avoided.
An accountant won’t wonder which VAT box “capital assets” should go into! They will know exactly how to follow HMRC VAT guidelines to the letter. They can reduce the risk of falling foul of HMRC assessments, penalties, and interest on late or inaccurate filings for VAT.
Accounting or bookkeeping businesses interested in cloud-based bookkeeping and accounting software or looking for a qualified accountant to outsource work to at busy times should check out Outbooks. Outbooks is a company that caters to bookkeepers and accountants who consistently deliver top-notch online accounting services at the best price to their own customers.