VAT: The Basics and the VAT Return
Thinking about registering for VAT, or recently registered? This plain-English guide covers when you must register, how output and input tax work, which rate to charge, the records you must keep, how to fill in the nine boxes of your VAT Return, and how to pay, correct mistakes and cancel your registration. It is based on HMRC's webinar "VAT: the basics and the VAT Return" and HMRC's published guidance, with links to the official sources at the end.
The 5 key points
1. Register once taxable turnover passes £90,000
Check your turnover over the last 12 months on a rolling basis, not just at your year end. Register within 30 days of the end of the month you went over, or within 30 days of realising you will go over in the next 30 days.
2. You pay the difference between output and input tax
Output tax is the VAT you charge customers; input tax is the VAT you pay on business purchases. If output tax is higher you pay HMRC the difference. If input tax is higher, HMRC repays you.
3. Charge the right rate on every sale
Most goods and services are standard rated at 20%, some are reduced rated at 5% and some are zero rated. Zero rated is not the same as exempt: you can reclaim VAT on costs for zero-rated sales, but not on exempt ones.
4. Keep digital records and use compatible software
Every VAT-registered business must keep digital records and file its VAT Returns through software compatible with Making Tax Digital. Keep VAT records for 6 years, or 10 years for the One Stop Shop schemes.
5. File and pay by 1 month and 7 days after each period
You must send a return even if you have nothing to pay or reclaim. Late returns build penalty points leading to a £200 penalty, and late payment penalties start once a payment is more than 15 days overdue.
Registering for VAT
VAT is value added tax. It is charged by VAT-registered businesses, and any "taxable person" can register: individuals, partnerships, companies, clubs, associations and charities. Whether you must register depends on your taxable turnover, which is the total of your taxable supplies. It does not include the VAT itself.
Voluntary registration
You can register even if your turnover is below the threshold, for example to reclaim VAT on your costs. If you do, you must follow all the same rules as any other VAT-registered business.
After you register
HMRC sends a VAT registration detail letter with your VAT registration number and your effective date of registration, and you can view your registration certificate online. From the effective date you must:
Changes you must report
Tell HMRC within 30 days if your name, trading name or main business address changes, if your accountant or agent changes, or if a partner joins or leaves or changes their name or home address. You might have to pay a penalty if you don't. Some changes mean you have to cancel or transfer your registration instead.
Standard VAT accounting
The VAT you charge your customers on what you sell.
The VAT you pay on purchases for the business.
For each VAT period, take your input tax away from your output tax. If the answer is positive you have a VAT payment to make; if it is negative, HMRC owes you a repayment.
VAT accounting schemes
Standard accounting suits most businesses, but HMRC offers schemes that can make VAT simpler or help cash flow: the Annual Accounting Scheme, the Cash Accounting Scheme, the Flat Rate Scheme, margin schemes for second-hand goods, and retail schemes. Each has its own conditions, and HMRC runs separate webinars on accounting schemes and the Flat Rate Scheme.
Charging VAT
VAT-registered businesses must charge VAT on their taxable supplies. The rate depends on the goods and services you supply.
Exempt and out of scope
Don't charge VAT on exempt goods and services, and don't reclaim VAT on the costs of making them unless you are partly exempt. If everything you sell is exempt, you cannot register for VAT.
Outside the VAT system altogether, so you can't charge or reclaim VAT. Examples include goods and services you buy and use outside the UK, statutory fees, goods sold as part of a hobby and donations to a charity.
Zero rated is not exempt
This is the distinction people most often get wrong. Zero-rated sales count towards your taxable turnover and let you reclaim VAT on what you buy to make them. Exempt sales do neither.
Keeping VAT records
HMRC may check your records to make sure you are paying the right amount of tax. You must keep a record of everything you buy and sell, including zero-rated, reduced-rate and exempt items, copies of all the VAT invoices you issue and all the invoices you receive.
Making Tax Digital for VAT
All VAT-registered businesses must keep some records digitally, including the VAT on supplies made and received, the time and value of each supply, adjustments to a return, reverse charge transactions and any accounting schemes used. Your software must be able to:
Invoices and your VAT account
Issue valid VAT invoices, keep copies of every invoice you issue, and keep all purchase invoices for items you buy.
A record of the output tax on your sales and the input tax on your purchases, which links your records to your return. Northern Ireland businesses must also show the VAT on any EU sales and purchases.
The VAT Return
Most businesses send a VAT Return every 3 months. The return and any payment are due 1 calendar month and 7 days after the end of the accounting period.
The nine boxes
Boxes 1 to 5 deal with the VAT you charge and reclaim. Boxes 6 to 9 report the values behind it.
Your business tax account
In your HMRC online business tax account you can view return deadlines and submitted returns, check what you owe and pay, view your payment history, track repayments and manage your VAT details. Payments can take up to 7 working days to show, and a submitted return can take up to 2 days to appear.
Paying VAT
You can pay online by approving a payment through your online banking, by debit or corporate credit card, or by Direct Debit. You'll need your 9-digit VAT registration number. HMRC's VAT payment deadline calculator works out when cleared funds must reach HMRC for your chosen method, though it can't be used if you make payments on account or use the Annual Accounting Scheme.
If your return shows a repayment, HMRC pays it to the bank account it holds for you, so keep those details up to date in your business tax account.
Correcting mistakes
You can correct an error by adjusting your next VAT Return if all three of these apply:
What happens if you're late
If you don't file, HMRC may send you a VAT assessment of what it thinks you owe. Late submission penalties work on points: you get a point for each late return until you reach the threshold, then a £200 penalty.
If a payment is more than 15 days overdue, first and second late payment penalties apply, plus late payment interest. If you can't pay in full, contact HMRC early about a Time to Pay arrangement.
Cancelling your registration
Your taxable turnover will not exceed the £88,000 deregistration threshold, you close down part of the business, or you exceed the registration threshold but sell mainly zero-rated goods. Cancellation takes effect from the date of your request or a later date you agree with HMRC.
You stop trading or making VAT taxable supplies, or you join a VAT group. Tell HMRC within 30 days and it will cancel your registration from the date of the change.
You can cancel online with your Government Gateway user ID and password. If your VAT group is closing, you'll also need to complete form VAT50/51.
What attendees said
In the live polls, 48% of attendees had been registered for more than 5 years and 19% were not yet registered. Asked whether you still need to send a VAT Return with nothing to pay or reclaim, 93% correctly answered yes.
Official guidance
- Register for VAT
- VAT: detailed information
- Record keeping (VAT Notice 700/21)
- Find software that's compatible with Making Tax Digital for VAT
- How to fill in and submit your VAT Return (VAT Notice 700/12)
- Pay your VAT bill
- VAT payment deadline calculator
- Check how to tell HMRC about VAT Return errors
- How late payment penalties work if you pay VAT late
- Cancel your VAT registration
- Our guide: VAT reverse charge for construction
Close to the VAT threshold, or newly registered? We handle VAT registration, returns and Making Tax Digital set-up for businesses across Paisley and Renfrewshire, and can check your figures before every return goes in.
Talk to us about VATThis guide is general information based on HMRC's published guidance and webinar, and is not advice for your specific circumstances. Rules change, so check the official guidance or speak to us before acting.