VAT returns: everything you need to know

There’s a lot to juggle in the world of business and filling in HMRC forms is rarely the highlight of the day. But as a responsible business owner, you need to make sure your company stays compliant with tax rules – and a VAT return helps you do that.

As most businesses submit a return quarterly, it won’t take long to understand the process. But if you’re new to VAT — either because you’ve just passed the threshold or want to register voluntarily — there’s a bit to learn before you start. Grasping the basics helps you submit your return correctly and avoid penalties, so let’s break it down. 

Key takeaways

• VAT returns show how much VAT your business owes or can reclaim from HMRC

• Most companies file quarterly returns using Making Tax Digital (MTD) software

• Accurate records and timely filing help you avoid penalties and stay compliant

What is a VAT return?

A VAT (Value Added Tax) return is a form some businesses submit to HMRC to report the VAT they have charged and the VAT they have paid to other firms. Most companies submit it every three months using accounting software compatible with HMRC’s Making Tax Digital system.

The return includes: 

• Your total sales and purchases

• The VAT you’ve charged customers (known as output VAT)

• The VAT you’ve paid on business expenses (known as input VAT)

If you’ve charged more VAT than you’ve paid, you pay the difference to HMRC. If you’ve paid more than you’ve charged, you can reclaim the difference.

Who needs to submit a VAT return?

You need to submit a VAT return if your business is VAT-registered. 

You must register for VAT once your taxable turnover exceeds £90,000 in a 12-month period or if you expect your taxable turnover to go over £90,000 in the next 30 days. You can choose to register voluntarily if you earn less, too. It’s worth investigating the pros and cons of being VAT registered before you decide to do this. 

You must also register, regardless of turnover, if you or your business is based outside the UK or if you supply any goods or services to the UK.

The first step is to find out how to register for tax. Then, once registered, you must submit regular VAT returns – even if you have no VAT to pay or reclaim for that period.

Getting ready to file: Making Tax Digital (MTD)

All VAT-registered businesses must follow Making Tax Digital rules. You need MTD-compatible accounting software, such as Xero or QuickBooks, to keep digital records and submit VAT returns. HMRC no longer accepts submissions through its online portal unless you’re exempt from MTD.

If you haven’t signed up yet, register through your HMRC account. Then link your accounting software to your VAT account, so you can submit returns directly in line with MTD requirements.

How to file a VAT return

You submit your VAT return directly through MTD-compatible accounting software. 

Most businesses file quarterly, though some report more or less frequently depending on their accounting period and set-up with HMRC. 

Before you start, check your records are accurate and up to date. It helps to then gather details of your sales, purchases, VAT charged and VAT paid for the period you’re reporting.

How to calculate a VAT return

Working out your VAT return is generally simpler than you might think. You just need to compare the VAT you’ve collected from customers and clients with the VAT you’ve paid on your own business costs. The difference tells you whether you owe HMRC or whether you’re due a refund.

Here’s how to do it:

• Add up the total VAT you’ve charged on your sales (output VAT)

• Add up the total VAT you’ve paid on business purchases and expenses (input VAT)

• Subtract your input VAT from your output VAT

If the result is positive, you owe that amount to HMRC. If the result is negative, you can reclaim that amount from HMRC.

Example:

• Output VAT: £2,400

• Input VAT: £1,800

£2,400-£1,800 = £600, which in this example means you owe £600 to HMRC.

If your input VAT was higher than your output VAT, it would work the other way around and you’d be able to reclaim the difference from HMRC.

How to complete a VAT return

Once you’ve gathered your figures, it’s time to fill in your VAT return. Each return has nine boxes, and you need to enter the right figures in each. Don’t worry too much, because your accounting software usually generates these automatically, but it helps to understand what each box means.

Once you’ve filled in all nine boxes, check the figures carefully and then submit through your accounting software. It’s a good idea to keep copies of your records and confirmation from HMRC in case you need them later.

How to pay VAT 

You must submit your VAT return and pay any VAT owed within one calendar month and seven days after the end of your accounting period. For example, if your accounting period ends on 31 March, your return and payment are due by 7 May.

You can pay HMRC in several ways, including:

• Direct Debit VAT payment through your HMRC account

• Online or telephone banking

• Debit or corporate credit card via HMRC’s payment service

• Standing order if you’re on the VAT Annual Accounting Scheme

• Through VAT payments on account

The payment must clear in HMRC’s account by the deadline, so be sure you allow enough time in line with the payment method you choose. 

If you’re struggling to find the cash to pay, you could consider a VAT loan. 

What happens after you file?

Once you’ve submitted your VAT return, HMRC processes it and confirms whether you owe money or are due a refund. If you owe VAT, make sure payment reaches HMRC by the deadline to avoid interest or penalties. If you’re due a refund, HMRC usually pays it directly into your linked business bank account within 30 working days.

Correcting errors on a VAT return

If you spot a mistake after filing, you can usually correct it for up to four years as long as:

• The net value of the error is £10,000 or less

• Or it’s between £10,000 and £50,000, but less than 1% of your sales for that period

For larger errors, or if the correction affects multiple periods, you must tell HMRC via their dedicated VAT Return errors page.

Always keep a record of what you corrected and why, in case HMRC requests evidence later.

Penalties for late filing and payment

HMRC uses a points-based system for late VAT returns, and separate penalties for late payments. Here’s how it works in practice.

Late filing

You get a penalty point each time you submit a return late. When you reach your points threshold, HMRC charges a £200 penalty. The threshold depends on how often you file:

• Annually – two-point threshold 

• Quarterly – four-point threshold 

• Monthly – five-point threshold 

If you continue to file late after reaching the threshold, you get another £200 penalty each time. You can reset your points by filing all returns on time for a set period.

Late payment

If you pay late, HMRC may charge both interest and penalties:

• Late payment interest – This is charged from the very first day the payment is overdue until it is paid in full. HMRC calculates this interest at the Bank of England base rate plus 4%

• No penalty if paid within 15 days – There’s no additional penalty charge if you pay in full or arrange a payment plan within 15 days of the due date

• 16-30 days late – A penalty of 3% of the VAT owed at day 15 is charged

• 31+ days late – An additional 3% penalty is charged on the amount still outstanding at day 30. A second penalty, calculated at a daily rate of 10% per year on the outstanding balance, starts to accrue from day 31 until the payment is cleared

To avoid late-payment penalties, always file and pay on time, or contact HMRC early if you can’t pay in full.

Common VAT schemes

VAT schemes enable eligible businesses to simplify how they calculate and report VAT. These schemes don’t change how much VAT you charge, only how you account for it.

Here are some of the main schemes:

• Flat Rate Scheme - You pay a fixed percentage of your turnover to HMRC rather than calculating VAT on every sale and purchase. 

• Cash Accounting Scheme - You account for VAT when you receive payment from customers and when you pay suppliers, not when you issue or receive invoices. It helps with cash flow. but delays your ability to reclaim VAT.

• Annual Accounting Scheme - Instead of filing quarterly, you file once a year, with interim payments spread across the accounting period. At the end, you make a final adjustment.  

• Retail Schemes - Designed for retailers, these schemes enable you to simplify VAT on goods sold. Options include Point of Sale, Apportionment and Direct Calculation schemes.