VAT return: all the information you need

Dealing with a VAT return might not be the most exciting part of running a business, but it’s a crucial one. If you’re VAT-registered in the UK, submitting VAT returns is just part of the deal.

At first glance, the numbers, deadlines and tax rules might seem overwhelming. But once you understand the process, it becomes much more manageable.

In this comprehensive guide, we’ll walk you through everything you need to know about VAT returns—from what they are and how to file them to key deadlines, penalties and what happens if HMRC takes a closer look at your accounts. So grab a coffee (or a strong cup of tea—VAT can be taxing), and let’s dive in.

What is a VAT return?

Let’s start with the basics. What exactly is a VAT return and why do you need to file one?

Simply put, a VAT return is something VAT-registered businesses submit to HM Revenue & Customs (HMRC), usually every quarter. So that’s once every three months. Think of it as a financial snapshot that tells HMRC how much VAT you’ve charged customers and how much VAT you’ve paid on business expenses.

Your VAT return includes:

• The VAT you’ve charged on sales (output VAT): This is the VAT customers pay when they buy from you. It’s typically 20%, though some goods and services have reduced or zero rates.
• The VAT you’ve paid on purchases (input VAT): This is the VAT you’ve paid when buying goods or services for your business. Again, this is usually 20%, depending on the type of purchase.
• The final balance: This shows the amount of VAT you owe HMRC or if you’re due a refund.

VAT is just a tax on goods and services. Short for “value added tax”, it’s usually charged at the standard rate of 20%. But some items like children’s car seats are taxed at a reduced rate of 5%. Other goods like most food and books are zero-rated.

Even if you have nothing to pay or reclaim, submitting your VAT return is still a legal requirement.

The good news? Once you get into the habit, VAT returns aren’t that difficult. But missing deadlines or filing incorrect returns can lead to penalties, interest charges and attention from HMRC. So it’s always best to stay on top of things.

Are you looking for insurance cover to support your business? Get in touch with us! A member of the Howden team would love to help you find the perfect policy!

Get a Quote

 

Who submits a VAT return?

If your business is VAT-registered, you must submit a VAT return. It’s as simple as that. But how do you know if you need to register for VAT  in the first place?

Well, VAT registration is mandatory if your business’s annual turnover (essentially, the total value of everything you sell) exceeds the VAT threshold. This is currently set at £90,000.

This means that as soon as your turnover goes above this limit within a 12 month period (or you expect it to) you must register for VAT with HMRC.

But what if your turnover is below this threshold? You don’t have to register for VAT, but many small businesses choose to.

Why? There are a few good reasons:

• Reclaim VAT on business purchases: If you buy goods or services that include VAT (like equipment, stock or professional services), registering means you can reclaim that VAT, saving your business money.
• Make your business look more professional: Some clients, especially those in business-to-business industries (like manufacturing, professional services or wholesalers) prefer to work with VAT-registered companies because it suggests a more established operation.
• Prepare your business for future growth: If you expect to cross the threshold soon, registering early avoids the rush of last-minute paperwork when you hit £90,000.

That said, VAT registration isn’t necessarily right for every small business. If you mostly sell to consumers who aren’t VAT-registered (for example, an adult’s clothes shop), adding VAT to your prices could make you less competitive. So it’s always worth weighing up the pros and cons for your business and chatting with an accountant if you’re unsure.

What are the basics of VAT returns?

Now we’ve covered what a VAT return is and who needs to submit one, let’s dive into more detail.

In basic terms, your VAT return will include:

• Total sales and purchases made during the period.
• The total value of sales where VAT was charged: output VAT minus VAT you’ve collected from customers.
• The VAT due on those sales: the amount you owe HMRC.
• The VAT you can reclaim on purchases: input VAT minus VAT you've paid on business expenses.
• The total VAT due for that period: the difference between your output VAT and input VAT.

If your output VAT is higher than your input VAT, you owe HMRC the difference. If your input VAT is higher than your output VAT, HMRC owes you a refund.

Here’s an example.

Let’s say you run a small online business selling handmade gifts. Over the last VAT period, you:

• Sold £10,000 worth of goods and charged 20% VAT. This would equal £2,000 in output VAT (the VAT you collected from customers).
• Purchased £5,000 worth of stock from VAT-registered suppliers and paid 20% VAT. This would equal £1,000 in input VAT (the VAT you paid on business expenses).

Now, to work out how much VAT you need to pay HMRC:

• Output VAT (£2,000) - Input VAT (£1,000) = VAT due to HMRC (£1,000).

If it were the other way around (meaning your input VAT exceeded your output VAT) you’d be due a VAT refund from HMRC.

Do all businesses file VAT returns quarterly?

At this point, you should also know that while most businesses submit VAT returns every three months (quarterly), there are exceptions. Some businesses use alternative VAT accounting schemes that change how often or how they calculate VAT.

For example:

• Flat Rate Scheme: Instead of working out input and output VAT separately, businesses pay a fixed percentage of their turnover as VAT. This simplifies VAT calculations but means you can’t reclaim input VAT on most purchases.
• Cash Accounting Scheme: VAT is only accounted for when you receive payment from customers or when you pay suppliers (rather than when invoices are issued). This can help with cash flow.
• Annual Accounting Scheme: Businesses submit just one VAT return per year instead of four, making it easier to manage finances. They still make advance VAT payments throughout the year, based on estimated turnover.

Choosing the right VAT scheme depends on your business type, cash flow and how you prefer to manage VAT payments. If in doubt, seek professional advice.

How do I submit my VAT return?

Now, how do you actually calculate and submit your VAT return?

It might seem complicated at first, but once you break it down, it’s pretty straightforward. Here are the key steps to submit your VAT return with minimal stress.

Step 1: getting your paperwork in order

Before you even think about submitting your VAT return, you need to gather the right records. Staying organised saves time and helps you avoid potentially costly mistakes.

If your VAT return isn’t accurate, HMRC could fine you up to 100% of any tax you’ve underpaid or overclaimed. So it’s worthwhile ensuring your figures are right!

Make sure you have:

• Sales invoices: A record of everything you’ve sold that includes VAT.
• Purchase invoices: Receipts and invoices for any VAT you’ve paid on business expenses.
• Bank statements: To double-check any transactions related to your VAT payments or refunds.

Since VAT is part of Making Tax Digital (MTD), you must keep digital records using software (like FreshBooks, Xero or Sage). This makes it easier to track everything and submit returns without last-minute panic.

There’s a handy search tool from HMRC, which lists all MTD-compatible accounting software. You can even filter for free versions.

Step 2: filling out your VAT return

Once you’ve got your numbers ready, it’s time to fill out your VAT return. You can do this through:

• HMRC’s online portal (only if you’re exempt from MTD).
• Accounting software which calculates your VAT for you and connects with HMRC.

As part of this, you’ll need to make sure all your relevant invoices and receipts are uploaded to your accounting software, so you can accurately categorise spending. You’ll then need to check:

• Total VAT due: The VAT you’ve charged your customers (output VAT).
• VAT you can reclaim: The VAT you’ve paid on business purchases (input VAT).
• The final amount you owe (or are owed): If your output VAT is higher than your input VAT, you pay the difference to HMRC. If it’s the other way around, HMRC will issue you a refund.

Most digital accounting software keeps track of VAT throughout the quarter. So when the deadline rolls around, all you need to do is (carefully) review and submit—no manual number-crunching required.

VAT return deadline

When are VAT returns due?

VAT returns are usually due one calendar month and seven days after the end of your VAT accounting period. You can work out your exact dates with HMRC’s VAT deadline calculator.

For businesses on the Annual VAT Accounting Scheme, your VAT accounting period will be 12 months. Annual VAT returns are due two months after the end of your VAT period. Even so, you’ll still have to make advance payments towards your VAT bill, either monthly or quarterly.

It’s important to note that the dates VAT returns are due are also the deadlines for payment. So don’t leave it to the last minute, and make sure there’s plenty of time for the money to hit HMRC’s account!

Step 3: submitting your VAT return

Most businesses must submit VAT returns online. Paper VAT returns are only allowed in rare cases (such as if you’re digitally exempt).

So for most businesses, you’ll submit your VAT return via MTD-compatible accounting software that links directly with HMRC. You can then log in to your Government Gateway online account to check everything’s gone through.

And that’s it. You’ve submitted your VAT return! Hooray.

How do HMRC check VAT returns?

Once you’ve submitted your VAT return, you might wonder, does HMRC actually check it? Well, the answer is yes, but not always. HMRC uses an automated system to flag potential issues. So while most businesses won’t face a VAT audit, some situations increase the chances of a check.

HMRC are more likely to take a closer look at your accounts if:

• You submit your VAT return late: Missing deadlines can raise red flags.
• There are large or unusual VAT refund claims: If you’re regularly claiming more VAT back than you’re paying, HMRC may want to double-check why.
• Inconsistent reporting: If your VAT returns show sudden, unexplained changes in turnover, expenses or VAT due, this might need an explanation.
• Industry risk factors: Some industries (such as hospitality and construction services) are more closely monitored due to common VAT errors.

That said, sometimes random checks happen too, even if nothing looks suspicious. So if you’re selected for a VAT audit, don’t panic. As part of an audit, HMRC might ask for additional documents via email or post. Alternatively, an HMRC officer could visit your premises to review VAT records in person.

As part of this, they may ask for:

• Sales and purchase records: Evidence of VAT you’ve charged and paid.
• Bank statements: To verify business transactions.
• Invoices and receipts: Proof of purchases and expenses.
• VAT account details: A breakdown of input and output VAT.

The good news is MTD-compatible accounting software makes it pretty straightforward to provide these sorts of documents to HMRC. So you can breathe a sigh of relief.

What happens if you make a mistake with VAT?

If you’ve made a mistake on your VAT return, it’s important to correct it as soon as possible. If the net error is £10,000 or less (or up to £50,000, but under 1% of your turnover), you can do this in your next VAT return. If it’s anything more than this, you’ll need to contact HMRC separately.

HMRC understands that genuine errors occur, especially for small businesses. So not every error necessarily results in a fine.

• If it’s minor and unintentional: HMRC may ask you to correct it on your next return.
• If the mistake led to an underpayment: you may need to pay the difference plus interest.
• If HMRC believes it was deliberate: penalties can be higher. In serious cases, they may take legal action.

Keeping clear, digital records is the best way to avoid VAT issues in the first place. But if you realise you’ve made an error after filing, don’t worry. Just make sure it’s corrected as soon as possible.

Quickfire summary: submitting your VAT return

VAT returns are a routine part of running a VAT-registered business. Once you’re in the swing of things, they’ll become much clearer and easier to manage.

Your VAT return is a summary of VAT charged on taxable sales and VAT paid on business purchases. It helps HMRC determine whether you owe VAT or are due a refund. Most businesses file VAT returns every three months. Under Making Tax Digital (MTD), submissions must be done online using compatible accounting software.

Staying on top of your VAT returns is all about good record-keeping. Keeping clear, digital records of sales invoices, purchase receipts and bank transactions ensures your returns are accurate and hassle-free. And if HMRC ever takes a closer look, having everything organised means there’s nothing to worry about.

Of course, VAT is just one of the responsibilities small business owners have to juggle. At Howden Insurance, we offer tailored business insurance policies that give you peace of mind. So you know your business is protected against any unexpected challenges. Get in touch today to find the right cover for your needs.

Also read:

• How to claim VAT back: Step-by-step guide
• What is a PO number?
• What expenses can I claim as self-employed in the UK?
• What is the UK tax return deadline?
• Read more of our business insurance guides