Value Added Tax, or VAT, is a sales tax imposed on sales of goods and services at each stage of production or distribution within the United Kingdom. The tax is charged on nearly all goods and services sold by VAT-registered firms, which are businesses that have registered with HM Revenue & Customs (HMRC) because they have crossed specified thresholds.
All British companies are required to be registered for VAT if they meet such qualifying conditions. That is, if their taxable turnover, the total of all the VAT-inclusive sales, is above £90,000 in a rolling period of 12 months.
Alternatively, if a business expects its taxable turnover to exceed this level during the next 30 days, then it will also have to register. Registered businesses are then required to add VAT onto their goods and services, invoice VAT to their customers, and pay accrued VAT to HMRC regularly.
For HMRC Value Added Tax Return (VAT Return), two concepts must be understood, i.e., input tax and output tax.
- Input Tax: Here, a VAT-registered business pays for acquisitions, expenses, or services bought from other VAT-registered businesses.
- Output Tax: Here, a business charges for the goods or services it sells.
The HMRC VAT return is a return filed by VAT-registered business to HMRC (His Majesty’s Revenue & Customs) every quarter to inform them of the variance in output and input tax and whether the company has to pay money to HMRC or owes money.
What to include in a VAT return
When presenting a VAT return, businesses must report a number of important financial amounts to HMRC. These amounts guarantee that the correct amount of VAT is paid out or recovered.
- Total Sales and Income: The total sales made during the period, minus the VAT paid upon them. This is to inform HMRC how much of your business’s activity there is before tax is added and is reported in Box 6 of the VAT Return.
- Total Purchases and Expenses: The value of all business-related purchases and expenses from VAT-registered suppliers, excluding VAT, is reported in Box 7 of the VAT Return.
- VAT Charged on Sales (Output tax): VAT charged on sales, also called output VAT, is the VAT a business that adds to the price of its taxable goods or services and collects from customers. The total output of VAT for the return period is reported in Box 1 of the VAT Return and represents the amount payable to HMRC.
- VAT Recovered on Purchases (Input tax): VAT is recovered on goods and services acquired for business purposes. Companies are usually able to recover this figure from HMRC.
- The Difference Between Input VAT and Output VAT: The final computation to perform is determining if the business owes to HMRC or if any amount is owed by HMRC. This is the comparison between output VAT and input VAT. The business will pay HMRC the difference if output VAT is higher than input VAT, and will receive a refund if input VAT is higher than output VAT.
Step-by-step process for Quarterly VAT Return (example)
VAT returns in the UK can be submitted monthly, quarterly, or annually, depending on the size and nature of the business.
- Quarterly returns are the most common and cover a three-month accounting period.
- Monthly returns are usually chosen by businesses that regularly reclaim VAT or have frequent transactions.
- Annual returns are available to businesses under the Annual Accounting Scheme, typically suited for smaller enterprises with a stable turnover.
Next is a step-by-step process of quarterly VAT Returns.
Step 1: Gather and Sort Records
The first step is to ensure that all invoices, receipts, and records of sales and purchases for the quarter are properly collected and organised. Your bookkeeping must be up to date so that VAT calculations are accurate. At this stage, it is important to separate VAT-exclusive amounts and clearly identify the VAT charged and paid.
Step 2: Calculate Output VAT (Sales VAT)
Second, calculate the total Output VAT. This is the VAT your business has charged customers on the sale of goods and services during the quarter. It represents the amount your business owes to HMRC, as you collect this VAT on behalf of the government.
Step 3: Calculate Input VAT (Purchase VAT)
After calculating your Output VAT, determine the VAT incurred on purchases and expenses (Input VAT) for the same reporting period.
Input VAT is the VAT you’ve paid to other VAT-registered suppliers for goods and services acquired for your business. You may claim this VAT, provided the goods or services are used for taxable business purposes, and the VAT has been charged correctly by the supplier.
Some items are ineligible for full VAT reclaim, for example certain entertainment costs (which are VAT-blocked) or non-business use. These must be excluded when computing your reclaimable Input VAT.
Step 4: Calculate the Net VAT Position
Then calculate both input VAT and output VAT. Subtract the input VAT from the output VAT. The difference if positive will imply that you owe HMRC that amount and if the net position is negative, this would mean that you need to recover the excess of Input Vat over Output VAT from HMRC.
Step 5: Log in to the Accounting Software or the HMRC Portal
According to the Making Tax Digital law, VAT returns are to be filed using MTD compliant accounting software such as Xero, QuickBooks, Sage, or FreeAgent. Businesses that have claimed a digital exclusion exemption can access HMRC’s online VAT return for filing. This is done by inserting the correct figures into the VAT return form.
Step 6: Verify the Return Before Filing
Prior to submitting, the return must be checked over. Double-check that everything is accurate, including all VAT, purchases, and sales figures. Make sure exempt or zero-rated sales have not been posted by mistake and rectify errors. This minimizes the chances of errors and penalties.
Step 7: File the VAT Return
On confirmation, submit the VAT return online on or before the statutory date, that is, one month and seven days from the VAT period end. HMRC will inform you after successful submission of the return.
Step 8: Pay or Claim Refund
The last step is to pay HMRC or request a refund. If you must pay VAT, you need to pay it by the deadline by an accepted means such as Direct Debit, BACS, or internet banking. If you are eligible for a refund, HMRC will, in most cases, make the repayment and transfer it to the nominated bank account within ten working days.
| For Example |
| BuildRight Construction Ltd, a VAT-registered contractor in the UK, has an Output VAT of £12,000 and an Input VAT of £4,000 for the period April–June. The Net VAT payable to HMRC is £8,000, calculated by subtracting Input VAT (£4,000) from Output VAT (£12,000). The company submits its VAT Return online through Making Tax Digital (MTD)-compliant software before the due date, and HMRC confirms receipt. BuildRight Construction Ltd then settles the £8,000 via Direct Debit. If, in another period, the Input VAT were higher than the Output VAT, the company would be entitled to an HMRC VAT refund, typically processed within ten working days. |
What to do when VAT is unpaid or overpaid?
For underpaid VAT, HMRC can recover late payment interest on the debt. Conversely, in the event that a business is overpaid VAT, HMRC can repay interest on the overpaid VAT. Below are what to do in the event of unpaid and overpaid VAT:
Unpaid VAT:
If the VAT payment deadline is missed, HMRC charges late payment interest on the amount due. The interest runs from the day after the payment date until payment is made. It will normally be the Bank of England base rate plus 4%.
What to do:
- Pay the outstanding VAT as quickly as possible to avoid additional interest charges.
- Phone HMRC in case of higher liabilities; a payment plan is occasionally available.
- Maintain proper records and set reminders for VAT deadline payments to avoid missing payments.
Overpaid VAT
If the company overpays VAT when output VAT is less than input VAT, HMRC will repay interest on the surplus. This typically starts from one day after overpayment and is paid at the Bank of England base rate minus 1%.
What to do:
- Recover the excess paid VAT in your next VAT return or recover the refund from HMRC.
- Make a note of the excess payment and your claim, in case HMRC asks for proof.
- Get your refund, which HMRC will normally send within 10 working days, into your bank account.
Conclusion
It may look daunting at first to complete your HMRC VAT tax return, but once you are taught how to do it, it is an easy part of operating a VAT-registered business in the UK. Having reliable records, inputs, and outputs in place, and submitting your return on time, you can stay within HMRC guidelines and avoid unwarranted interest or penalty.
At AcoBloom, our specialist accountants possess extensive compliance assistance experience for the UK. With a business’s impeccable track record of compliant operations according to HMRC rules, we simplify the return process for businesses, eliminate errors to zero, and steer clear of late submissions.
