Once registered for VAT, you must submit VAT returns -- usually quarterly -- and pay any VAT you owe to HMRC. If HMRC owes you (because your input VAT exceeds your output VAT), you receive a repayment. Understanding how VAT is calculated, which accounting scheme suits your business, and how to submit correctly will help you avoid penalties.

How VAT is calculated

The basic VAT calculation on each return is:

Output VAT (VAT you charged on sales) minus Input VAT (VAT you paid on business purchases) = Net VAT due

If the result is positive, you owe HMRC that amount
If the result is negative, HMRC repays you the difference

Output VAT must be accounted for on all taxable supplies at the correct rate (20% standard, 5% reduced, 0% zero-rated). Input VAT can only be reclaimed on purchases used for taxable business purposes, and you must hold a valid VAT invoice as evidence.

VAT accounting schemes

HMRC offers several accounting schemes designed to simplify VAT for different business types. You can only use one scheme at a time (with some exceptions).

Standard accounting

The default method. You account for VAT based on invoice dates (the tax point), regardless of when payment is received. You calculate output VAT on each sale and reclaim input VAT on each purchase. Suits businesses with straightforward transactions and prompt-paying customers.

Flat Rate Scheme

Instead of tracking VAT on every transaction, you pay HMRC a fixed percentage of your gross (VAT-inclusive) turnover. The percentage depends on your trade sector (ranging from 4% for food retail to 14.5% for consultancy). You receive a 1% discount in your first year of VAT registration. You cannot reclaim input VAT on most purchases (exception: single capital assets over £2,000 including VAT). Limited cost traders -- businesses spending less than 2% of turnover on goods, or less than £1,000 per year -- must use the higher rate of 16.5% regardless of sector. Eligibility: estimated VAT-taxable turnover of £150,000 or less (excluding VAT).

Cash Accounting Scheme

You account for VAT when you receive payment from customers and when you pay suppliers, rather than when invoices are issued. This is a significant cash flow benefit if you have slow-paying customers. Eligibility: taxable turnover of £1.35 million or less. You must leave if turnover exceeds £1.6 million.

Annual Accounting Scheme

You submit one VAT return per year instead of four. You make advance payments towards your VAT bill (usually 9 monthly or 3 quarterly instalments based on your previous year's liability), then settle any balance with your annual return. Eligibility: taxable turnover of £1.35 million or less. You must leave if turnover exceeds £1.6 million. Cannot be combined with the Flat Rate Scheme.

VAT schemes comparison

Compare Standard, Flat Rate, and Cash Accounting VAT schemes. Pure data reference.

Standard VAT: Pay VAT on invoices issued. Reclaim VAT on purchases in full.
Flat Rate Scheme: Pay fixed % of turnover. Cannot reclaim VAT on most purchases. Turnover max: £150,000.
Cash Accounting: Pay VAT when customers pay you. Helps cash flow. Turnover max: £1.35 million.
Annual Accounting: File one VAT return per year. Make advance payments. Turnover max: £1.35 million.

VAT schemes

Making Tax Digital (MTD) for VAT

Since April 2022, all VAT-registered businesses must comply with Making Tax Digital, regardless of turnover. This means:

Digital records: You must keep your VAT records digitally using MTD-compatible software -- spreadsheets alone are not sufficient unless linked to compatible software via a digital link
Digital submission: VAT returns must be submitted directly from your software via HMRC's API -- you cannot type figures into the HMRC online portal
Digital links: All transfers of data between software programs must be digital (no manual re-keying). If you use a spreadsheet alongside accounting software, they must be connected by a digital link
Bridging software: If your records are in spreadsheets, you can use bridging software to submit returns to HMRC. The bridging software reads your spreadsheet data and transmits it digitally

1. Record VAT throughout the period

Use your MTD-compatible software to record output VAT on every sale and input VAT on every business purchase. Ensure you hold valid VAT invoices for all input VAT claims.
2. Review and reconcile before submitting

At period end, check that your figures are correct. Review the nine VAT return boxes -- particularly box 1 (output VAT due), box 4 (input VAT reclaimable), and box 5 (net VAT to pay or reclaim). Cross-check against your bank statements and sales records.
3. Submit through MTD-compatible software

Use your software to submit the return directly to HMRC via the MTD API. You will receive a confirmation with a unique receipt number. Keep this for your records.
4. Pay any VAT owed before the deadline

Pay HMRC by one month and seven days after the end of your VAT period (for electronic submissions). Choose a payment method that clears in time -- direct debit (taken 3 working days after the deadline), online banking (same or next day), or BACS (3 working days).
5. Claim repayment if HMRC owes you

If your input VAT exceeds output VAT, HMRC will repay you. Repayments are usually made within 30 days of receiving your return. If you regularly receive repayments, consider switching to monthly returns for faster cash flow.

Submission deadlines

The standard deadline is one calendar month and seven days after the end of your VAT period (for electronic submissions, which is now the norm under MTD). For example, a quarterly return covering January to March is due by 7 May.

Different deadlines apply for:

Monthly returns: same one month and seven days rule, but applied monthly
Annual Accounting Scheme: the annual return is due two months after the end of your VAT year
Paper returns (now exceptional -- only permitted by specific HMRC agreement): due one calendar month after the period end (no extra seven days)

Payment methods and clearing times

Your payment must clear into HMRC's account by the deadline. Allow enough time for processing:

Direct Debit: automatically collected 3 working days after the deadline -- you must set this up in advance via your Government Gateway account
Online or telephone banking (Faster Payments): same day or next working day
BACS: 3 working days
CHAPS: same day (but may incur a bank charge)
Standing order: suitable for Annual Accounting Scheme advance payments

VAT late submission penalties

Points-based penalty system for late VAT returns, including point thresholds by filing frequency and penalty amounts.

From 1 January 2023, HMRC uses a points-based penalty system for late VAT returns. Each late submission adds a penalty point to your account. When you reach the threshold for your filing frequency, you receive a £200 penalty and continue to receive £200 for each subsequent late submission until points are reset.

Penalty amount (at threshold): £200 per late submission
Points threshold (annual returns): 2 points
Points threshold (quarterly returns): 4 points
Points threshold (monthly returns): 5 points
Points expiry period: 24 months of timely submissions after reaching threshold
Effective date: VAT periods starting on or after 1 January 2023

How points accumulate

You receive one penalty point for each VAT return submitted late. Points accumulate separately from financial penalties:

Below threshold: No financial penalty, but points remain on your record
At threshold: £200 penalty for the late return that triggered the threshold
Above threshold: £200 for every subsequent late return until points reset

Resetting points to zero

To reset your points after reaching the threshold, you must:

Submit all outstanding returns
Submit all returns on time for a 24-month period of compliance

If you have not reached the threshold, points expire 24 months after they were incurred (provided you have no further late submissions).

Penalty points and penalties if you submit your VAT return late

VAT late payment penalties

Penalty structure for late VAT payments, including first and second penalty charges and daily interest rates.

From 1 January 2023, late payment of VAT incurs two separate penalties plus interest. The system operates differently to the points-based late submission regime.

First 15 days late: No penalty (but interest accrues from day 1)
16 to 30 days late: 2% of VAT outstanding at day 15
Over 30 days late (first penalty): 2% of VAT outstanding at day 15 PLUS 2% of VAT outstanding at day 30
Over 30 days late (second penalty): 4% per year (calculated daily on outstanding balance)
Late payment interest rate: Bank of England base rate plus 2.5% (calculated daily from due date)
Effective date: VAT periods starting on or after 1 January 2023

Understanding the two penalty structure

First penalty: A fixed charge based on percentage of outstanding VAT:

Paid within 15 days: No penalty
Paid between 16-30 days: 2% of what you owed at day 15
Paid after 30 days: 2% (day 15) + 2% (day 30) = 4% of outstanding VAT

Second penalty: An ongoing daily charge (annualised at 4%) that accrues from day 31 until you pay in full. This is in addition to the first penalty.

Late payment interest

Interest is charged from day 1 after the due date at the Bank of England base rate plus 2.5%. This is separate from penalties and applies to all late payments.

Interest calculation basis: Daily simple interest (not compounded)
Interest start date: Day after the payment due date
Current interest rate (January 2026): Check HMRC website for current Bank of England base rate plus 2.5%

Penalty points and penalties if you submit your VAT return late

Correcting errors on VAT returns

If you discover an error on a previous VAT return, how you correct it depends on the size of the error:

Net error of £10,000 or less: adjust on your next VAT return by adding or subtracting the difference in the appropriate box
Net error between £10,001 and £50,000: you may still adjust on your next return if the error is no more than 1% of your box 6 figure (total sales excluding VAT) for the current period
Net error over £50,000, or over 1% of box 6: you must disclose the error separately to HMRC using form VAT652 (or by letter)

Deliberate errors cannot be corrected on a return and must always be disclosed to HMRC. Penalties for deliberate errors are more severe than for careless mistakes.

Common VAT return errors to avoid

Frequent mistakes businesses make when completing VAT returns and how to avoid them.

Including VAT in boxes 6-9: Error: Including VAT-inclusive figures. Correct: All values must exclude VAT
Claiming blocked input tax: Error: Reclaiming VAT on business entertainment or private use. Correct: Exclude blocked items from box 4
Missing invoices: Error: Claiming input tax without valid VAT invoice. Correct: Only reclaim with proper documentation
Wrong tax point: Error: Including sales in wrong period. Correct: Use invoice date or delivery date as appropriate
Omitting zero-rated sales: Error: Not including exports in box 6. Correct: Include all sales regardless of VAT rate
Double-counting EU boxes: Error: Forgetting to include box 8/9 figures in boxes 6/7. Correct: EU figures appear in both
Reverse charge errors: Error: Not accounting for reverse charge on overseas services. Correct: Include in both box 1 and box 4
Cash accounting mismatch: Error: Mixing cash and invoice accounting. Correct: Use one method consistently

Correcting errors

Errors up to £10,000 (or 1% of turnover if greater, up to £50,000) can be corrected on your next VAT return. Larger errors must be disclosed to HMRC separately using form VAT652.

Deliberate errors or repeated mistakes may result in penalties.

How to fill in and submit your VAT Return (VAT Notice 700/12)

Bad debt relief

If you have accounted for output VAT on a sale but your customer has not paid you, you can reclaim the VAT through bad debt relief. The conditions are:

The debt must be at least 6 months old from the later of the date of supply or the date payment was due
You must have written off the debt in your VAT accounts and transferred it to a separate bad debt account
The debt must not have been sold or factored
You must not have been paid for the supply in any other form

Claim bad debt relief by including the VAT amount in box 4 (input VAT) of your VAT return for the period in which the conditions are met. You must keep a record of the claim for 6 years, including the customer's name, the amount of VAT being reclaimed, and the VAT period in which you originally accounted for the output VAT.

Partial exemption

If your business makes both taxable and exempt supplies, you are partially exempt. You can only reclaim input VAT attributable to your taxable supplies. The standard method calculates the proportion of taxable supplies to total supplies and applies that percentage to your input VAT.

However, if your exempt input VAT is both under £625 per month on average and less than 50% of total input VAT, you fall below the de minimis limit and can reclaim all your input VAT as if fully taxable. You can also agree a special method with HMRC if the standard method does not produce a fair result for your business.

Official VAT returns guidance on GOV.UK

Use these links for detailed guidance on submitting returns, paying VAT, and correcting errors.

Submit your VAT return
Sign in to your Government Gateway account to submit your VAT return.
gov.uk
Pay your VAT bill
Payment methods and deadlines for paying VAT.
gov.uk
How to fill in your VAT return (VAT Notice 700/12)
Detailed guidance on completing each box of the VAT return.
gov.uk
Late submission and payment penalties
How the points-based penalty system works for late VAT returns and payments.
gov.uk
Correct VAT errors (VAT Notice 700/45)
How to correct errors on previous returns and when to use form VAT652.
gov.uk
Bad debt relief (VAT Notice 700/18)
How to reclaim VAT on invoices your customers have not paid.
gov.uk
Find MTD-compatible software
Search for software compatible with Making Tax Digital for VAT.
gov.uk
Difficulties paying HMRC
How to set up a Time to Pay arrangement if you cannot pay your VAT on time.
gov.uk

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Submitting VAT returns

How VAT is calculated

VAT accounting schemes

Standard accounting

Flat Rate Scheme

Cash Accounting Scheme

Annual Accounting Scheme

Making Tax Digital (MTD) for VAT

1. Record VAT throughout the period

2. Review and reconcile before submitting

3. Submit through MTD-compatible software

4. Pay any VAT owed before the deadline

5. Claim repayment if HMRC owes you

Submission deadlines

Payment methods and clearing times

Correcting errors on VAT returns

Bad debt relief

Partial exemption

Compliance Assistant

🧪 Business Context Testing

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How VAT is calculated

VAT accounting schemes

Standard accounting

Flat Rate Scheme

Cash Accounting Scheme

Annual Accounting Scheme

Making Tax Digital (MTD) for VAT

1. Record VAT throughout the period

2. Review and reconcile before submitting

3. Submit through MTD-compatible software

4. Pay any VAT owed before the deadline

5. Claim repayment if HMRC owes you

Submission deadlines

Payment methods and clearing times

Correcting errors on VAT returns

Bad debt relief

Partial exemption

Related guides in Compliance & Legal

Business Context Testing

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