Submitting VAT returns

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.

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

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

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 the online error correction service (or by writing to HMRC)

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.

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.