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Mastering VAT Return: A Step-by-Step Guide for UK Businesses

Mastering VAT return is crucial for businesses to effectively navigate the complexities of Value Added Tax (VAT) regulations and ensure accurate reporting. VAT returns play a pivotal role in documenting and calculating the VAT liabilities or refunds owed by businesses. If you’re unsure, we have put together the ultimate guide to mastering VAT returns to get you started. We have covered everything you need to know, from the basics to tips you can implement to avoid costly mistakes. 

What Is a VAT Return (Value Added Tax)?

If you have a VAT-registered business, your goods and services must include a VAT charge, which you will pay to the HMRC. A VAT return is a calculation of how much VAT you owe the HMRC or whether you are due a refund, and if so, by how much. When you purchase products or services from your supplier, you will be charged VAT which you will need to keep a record of, and then ensure you have a record of the VAT you charge your customers when they purchase from you. The return should feature a summary of what you paid against when you sold.

Please note your VAT return is different from your annual tax returns. 

Different VAT Rates and Categories

For VAT rates, the standard amount is 20%. However, there are three different categories of VAT rates as follows:

  • Standard Rate: 20% applied to most goods and services
  • Reduced Rate: 5% applied to some goods and services, i.e. home energy 
  • Zero Rate: 0% applied to most food and children’s clothes

VAT Registration Explained

Your business must be VAT registered if the taxable turnover for a consecutive 12-month period exceeds the current VAT threshold. As of 2023, the VAT threshold is £85,000 and will remain fixed at this number until March 31st 2024. 

How to Register for VAT In the UK

You can register for VAT in the UK by registering online with the HMRC directly or by using an accountant who will deal with the HMRC on your behalf. 

You also need a lot of information to register for VAT in the UK, whether using an agent or registering online. 

For a Limited Company, You Will Need:

  • Company Name
  • Turnover 
  • Nature of Business
  • Bank Account Details
  • Company Registration Number
  • Unique Tax Reference (UTR) number
  • Corporation Tax Information
  • Pay As You Earn (PAYE) Information
  • Self Assessment Information

For an Individual or Partnership, You Will Need: 

  • Date of Birth
  • National Insurance Number
  • ID (passport or driving licence)
  • Turnover
  • Nature of Business
  • Bank Account Details
  • Self Assessment UTR (if applicable)
  • Payslips
  • P60
  • Self Assessment Return

VAT Return Basics

The purpose of a VAT return is to provide an overview of the VAT collected from sales and the VAT paid on purchases during a specific period. By submitting VAT returns, businesses fulfil their obligation to report VAT information, calculate their net VAT liability, and settle any outstanding tax amounts with the tax authorities.

Understanding VAT Accounting Periods and Deadlines

Your VAT accounting period is 12 months, with your VAT return being due once a year. It is typically due two months after your accounting period ends.

You must also make advanced payments on your VAT bill, and you can choose to make these either monthly or quarterly during your accounting period. You will then make a final payment when you submit your VAT return. The deadlines for these are as follows:

  • Monthly Payment: Due at the end of months 4, 5, 6, 7, 8, 9, 10, 11 and 12
  • Quarterly Payment: Due at the end of months 4, 7 and 10
  • Final Payment: Due within 2 months of the end of month 12

Explaining Input Tax and Output Tax

When registering and completing your VAT returns, you may notice mention of input and output tax. The difference between the two is simple. Input tax is the amount of VAT you pay for taxable goods and services you use in your business. Output tax is the amount of VAT you charge when you sell goods and services via your registered business. 

Preparing for VAT Return

Preparing for a VAT return is crucial for businesses to ensure accurate reporting and compliance with tax regulations. By diligently organising and reviewing their financial records, businesses can identify and rectify any errors or discrepancies before submitting the return.

How to Maintain Accurate VAT Records

When it comes to preparing for a VAT return, you must keep accurate records, which the HMRC may request to ensure that you are paying the right amount of tax. These include keeping a record of:

  • Everything you buy and sell 
  • Copies of invoices you give and receive
  • Self-billing agreements
  • Name, address and VAT number of self-billing suppliers
  • Debit or credit notes
  • Goods you give away or take from stock for your private use

The Different VAT Schemes Explained

There are also different VAT schemes available from the HMRC, which you can voluntarily join, designed to simplify the way you calculate and account for VAT to the HMRC. However, it should be noted that utilising these schemes does not change the amount of VAT that businesses charge for products or services. 

VAT Flat Rate Scheme 

By using the VAT flat rate scheme, you can work out the VAT you owe the HMRC as a percentage of your gross turnover. However, you can only use this scheme if you are a small business with a turnover of £150,000 or less, excluding VAT.

VAT Annual Accounting Scheme 

The VAT annual accounting scheme allows you to complete one VAT form a year instead of four. 

VAT Cash Accounting Scheme 

The VAT cash accounting scheme means you will pay VAT to the HMRC when your customer pays you. 

Common Mistakes to Avoid When Filling out a VAT Return

When filling in your VAT return, you must be meticulous in your accuracy and attention to detail. This is why many business owners choose to utilise the services of a trained accountant to offer advice and guidance. Here are six common mistakes you must avoid when filling out a VAT return:

  1. Not double-checking your figures. 
  2. Adopting the wrong VAT scheme. 
  3. Reclaiming without evidence and records. 
  4. Claiming VAT on insurance. 
  5. Not reclaiming VAT on fuel, cars and entertainment. 
  6. Using the flat rate scheme beyond its expiry. 

VAT Inspections and Compliance

Tax authorities may conduct VAT inspections to verify the accuracy and completeness of a business’s VAT returns, assess compliance with VAT rules, and identify any potential irregularities or discrepancies. This is why you should maintain proper records and procedures to demonstrate compliance and cooperate with tax authorities during VAT inspections to avoid penalties.

Tips for Maintaining Compliance and Avoiding Penalties

When it comes to maintaining compliance with VAT inspections, there are some tips you can implement to ensure you avoid penalties. Such as;

  • Maintain accurate records and documentation containing well-organised and detailed records of invoices, receipts, and relevant VAT-related documentation.
  • By conducting regular audits and having robust controls in place, you can identify and rectify potential non-compliance issues before they become significant problems.
  • Seek professional advice from a qualified accountant if you are concerned about potential risks and implementing appropriate measures to avoid penalties. 

Common Issues That Arise During a VAT Inspection

If you are contacted about a VAT inspection, you most likely will want to know what to expect from the visit. The professional carrying out the VAT inspection will want to know more details about:

  • Business activities 
  • Regular VAT repayments 
  • Areas of the business
  • Introductions of cash or theft of stock

Frequently Asked Questions About VAT Returns

You can find a number of your queries and frequently asked questions below;

Where do I need to submit my VAT return?

You can submit your VAT return online to the HMRC using the government UK site. Alternatively, you can submit your VAT return via post. 

How difficult is it to complete a VAT return?

How difficult you find completing your VAT return depends on your business, with simple models able to complete their returns without any issue. However, for more complex businesses, you may find an expert’s help beneficial. You can enlist the help of a trained accountant to help you with your VAT return, and they will ensure there are no inaccuracies, errors or discrepancies before you submit your VAT return. 

What is the cash accounting scheme?

The cash accounting scheme allows you to pay VAT to the HMRC when your customer pays you. It is a voluntary scheme and does not change how much VAT you charge or pay. 

Can I resubmit my VAT return if I’ve made an error?

Yes, you can resubmit your VAT return online or by post if you have made an error up to 12 months past the submission deadline. 

Can I change to monthly VAT returns?

Yes, you can make VAT returns monthly if quarterly submissions do not suit your business. You can apply online via the HMRC to make this change or submit a VAT484 form via the post. 

Conclusion

To summarise, mastering the VAT process is essential for businesses to ensure accurate VAT returns and maintain compliance. By understanding the intricacies of VAT regulations, businesses can avoid costly mistakes and penalties. Learning about VAT rules, keeping meticulous records, and implementing robust accounting systems will help ensure accurate reporting of VAT transactions. 

We hope our guide has helped you to understand the VAT return process. 

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