At The VAT Consultancy, we specialise in helping UK businesses navigate the complexities of VAT returns. Whether you’re a small start-up or a well-established company, ensuring that your VAT returns are accurate and submitted on time is essential. VAT (Value Added Tax) is a significant part of business administration in the UK, and mistakes can lead to penalties and disrupt cash flow.

In this guide, The VAT Consultancy will provide key insights into mastering VAT returns, along with essential tips and advice that will help your business stay compliant and efficient when dealing with VAT obligations.

What Are VAT Returns and Why Are They Important?

VAT returns are quarterly (or monthly if you receive regular refunds of VAT) submissions to HMRC, detailing how much VAT your business has charged on sales (output tax) and how much VAT you’ve paid on purchases (input tax) that can be reclaimed. If your output tax exceeds your input tax, you’ll pay the difference to HMRC. If your input tax is higher, you can reclaim the excess VAT.

At The VAT Consultancy, we know that submitting accurate VAT returns is vital for staying compliant with UK tax laws. Incorrect or late VAT returns can lead to costly penalties, so it’s crucial to understand the importance of managing this part of your financial obligations effectively.

VAT Registration Threshold

If your business’s taxable turnover exceeds £90,000 in a rolling 12-month period, you must register for VAT. Even if your turnover is below this threshold, you can voluntarily register in certain circumstances, which allows you to claim VAT on your purchases.

Monitoring your turnover is key to ensuring timely VAT registration. At The VAT Consultancy, we help businesses monitor their finances and guide them through the registration process to ensure they comply with VAT requirements from day one. This is the first step towards filing accurate VAT returns.

Choosing the Right VAT Scheme for Your VAT Returns

When it comes to VAT returns, selecting the appropriate VAT scheme can make a significant difference in both time and cost management. Here are some schemes that The VAT Consultancy often recommends:

Standard VAT Accounting Scheme

The most common scheme, where VAT returns are based on the actual VAT you’ve charged and paid. While straightforward, it requires meticulous record-keeping and detailed VAT returns. This scheme suits businesses with steady cash flow.

Flat Rate Scheme

For businesses with turnover below £150,000, the Flat Rate Scheme simplifies VAT returns by allowing a fixed percentage of turnover to be paid as VAT (this will be less than 20% and varies by industry). This scheme can reduce the time spent on VAT administration, though businesses cannot reclaim VAT on most purchases.  The flat rate % is effectively set below 20% to compensate for this.

Cash Accounting Scheme

With cash accounting, you only pay VAT when you receive payment from customers, and you reclaim VAT when you pay suppliers. This can be helpful for businesses with tight cash flow. The VAT Consultancy often recommends this scheme to businesses that face delayed customer payments.  This can only be used by businesses with a turnover under £1.35m although there is a tolerance of up to £1.6m before businesses using the scheme must leave it (and special rules apply during the transition).

Annual Accounting Scheme

Businesses opting for this scheme (who must have a turnover below £1.35m) submit one VAT return annually, making advance payments throughout the year. It offers a predictable cash flow, but for companies with fluctuating income, this scheme may not be ideal.

At The VAT Consultancy, we work closely with our clients to choose the VAT scheme that best suits their needs, simplifying the process of VAT returns and minimising the administrative burden.

Payments on Account Scheme

This is a mandatory scheme for businesses with a VAT liability of £2.3m or more in a 12 month period.  VAT returns are still filed each quarter but fixed VAT payments are made in months 1 and 2 of the quarter (calculated as 1/24 of the annual VAT liability in the prior year).  In month 3 an actual balancing payment is made.  It is important to review the schedule provided by HMRC each year to ensure it is accurate and that there have not been any material changes to activities in the past year that would impact on the VAT liability eg business disposals, an increase in exports.

The Importance of Accurate Record-Keeping for VAT Returns

Accurate record-keeping is the backbone of correct VAT returns. HMRC requires businesses to keep VAT-related documents for six years, including:

• Sales and purchase invoices
• VAT account showing the VAT charged and reclaimed
• Records of goods imported or exported

Poor records can lead to incorrect VAT returns, resulting in penalties or missed opportunities to reclaim input VAT. To streamline this process, The VAT Consultancy encourages businesses to invest in accounting software that integrates with their VAT reporting, ensuring all necessary data is captured efficiently and accurately.

Carrying out Checks on the VAT Return Data

Preparing an accurate VAT return is not just a question of ensuring the values add up and reconcile.  This has little value if the incorrect VAT treatment has been applied to sales or if VAT is being recovered on costs when there is no valid VAT invoice to support this.  Spot checks on underlying transactions (including reviewing the source invoices) hold the key to this.  Checks should be comprehensive and should focus on sales without VAT eg exports, to ensure the conditions attached to the VAT relief are met (eg proof of export being held).  High value purchases with VAT should be reviewed to ensure a valid VAT invoice is held.

Making Tax Digital (MTD)

Since April 2019, most VAT-registered businesses have been required to submit VAT returns using Making Tax Digital (MTD) compliant software. MTD aims to make tax administration more efficient by keeping records digitally and automating VAT submissions.

As of April 2022, all VAT-registered businesses must comply with MTD. At The VAT Consultancy, we help businesses transition to MTD-compliant software and ensure they understand the new digital requirements for submitting VAT returns. This can significantly reduce the risk of errors and streamline the process of filing returns.

How to Accurately Calculate VAT for Your VAT Returns

When preparing VAT returns, calculating VAT correctly is essential to avoid overpaying or underpaying VAT. Here’s the basic formula:

VAT Due = Output VAT − Input VAT

 

Output VAT is the VAT you’ve charged customers, and input VAT is what you’ve paid on your business purchases. If your input VAT exceeds your output VAT, you can claim the difference from HMRC.

At The VAT Consultancy, we ensure our clients calculate their VAT obligations correctly, reducing the risk of overpaying or missing out on reclaiming VAT on eligible business purchases.

Common Mistakes to Avoid in VAT Returns

While submitting VAT returns, businesses often make avoidable mistakes that lead to penalties. Some common errors include:

• Applying incorrect VAT rates: Ensure you’re using the correct VAT rate (standard, reduced, or zero) for your goods or services.
• Missing submission deadlines: HMRC imposes penalties for late VAT returns or payments. Setting reminders or using The VAT Consultancy’s compliance services can ensure deadlines are not missed.
• Failure to claim all input VAT: Many businesses forget to reclaim VAT on small or overlooked purchases. Keeping thorough records and making sure you have valid VAT invoices for costs ensures you can claim everything you’re entitled to.
• Misclassification of goods and services: Some transactions may be exempt from VAT, so it’s essential to classify them correctly on your VAT return.

At The VAT Consultancy, we help businesses avoid these common pitfalls, ensuring VAT returns are submitted accurately and on time.

Understanding VAT Penalties

HMRC’s penalty system is based on a points threshold for late VAT returns. Accruing too many points leads to financial penalties. The best way to avoid penalties is by submitting returns on time, maintaining accurate records, and paying the correct amount of VAT.

If you make a mistake on your VAT return, it’s vital to correct it promptly. HMRC may reduce penalties if you notify them of errors quickly. At The VAT Consultancy, we assist our clients in rectifying any mistakes and ensure their returns are accurate and compliant.

Reclaiming VAT on International Transactions in Your VAT Returns

If your business deals with overseas suppliers or customers, your VAT returns will likely be more complex. For example, importing goods from the EU might involve paying import VAT, which you can now pay and reclaim on your VAT return using the PIVA system.

Understanding international VAT rules is critical to accurate VAT returns. The VAT Consultancy offers specialised advice for businesses dealing with cross-border transactions, ensuring they comply with all relevant VAT laws and can reclaim any eligible VAT.  We can also advise on how you reclaim overseas VAT incurred on business costs and whether you should have incurred overseas VAT in the first place.

The Benefits of Professional Support for Your VAT Returns

VAT returns can be complex and time-consuming, especially for businesses with limited accounting resources. At The VAT Consultancy, we offer expert advice and support to businesses across the UK, ensuring their VAT returns are accurate, compliant, and submitted on time.

From selecting the right VAT scheme to preparing digital records for MTD compliance, we help businesses manage every aspect of their VAT returns. This ensures our clients focus on growing their business rather than worrying about tax obligations.

Simplify Your VAT Returns with The VAT Consultancy

VAT returns don’t have to be a burden. With the right tools, knowledge, and support, they can become a manageable part of running your business. At The VAT Consultancy, we are committed to helping UK businesses master their VAT returns, ensuring compliance with HMRC while optimising VAT-related financial processes.

By following the tips in this guide, keeping accurate records, and choosing the right VAT scheme, your business can minimise errors and reduce the risk of penalties. Should you need expert assistance, The VAT Consultancy is always ready to support you with professional guidance and tailored solutions.

Mastering VAT returns is key to maintaining financial health and compliance for your business – let The VAT Consultancy help you every step of the way.

The VAT Consultancy is highly experienced and provides relevant and practical advice to help you deal with the VAT and customs duty issues your organisation faces.  We provide global tax and customs duty advice and VAT compliance services.

To discuss how we can help contact us today or call us on +44 203 2806902.