Tax

What is VAT Return?

A VAT return is a regular submission to HMRC showing the VAT you've charged (output VAT) and paid (input VAT), with the difference paid or reclaimed.

Example

You charged £10k VAT on sales, paid £3k VAT on purchases. VAT return shows £7k owed to HMRC.

Key Dates

Usually quarterly; due 1 month and 7 days after quarter end

How VAT Return Works in Practice

A VAT return is the form you submit to HMRC, usually every quarter, reporting the total VAT you have charged on your sales (output VAT) and the total VAT you have paid on your business purchases (input VAT). The difference between the two determines whether you owe HMRC money or are due a refund. Since April 2022, all VAT-registered businesses must submit returns digitally through Making Tax Digital (MTD) compatible software.

The VAT return consists of nine boxes, commonly referred to as the 'nine-box return'. Box 1 is the VAT due on sales and other outputs. Box 2 is VAT due on acquisitions from EU member states (still applicable in certain scenarios post-Brexit). Box 3 is the total VAT due (Box 1 + Box 2). Box 4 is the VAT reclaimed on purchases and other inputs. Box 5 is the net VAT to pay or reclaim (Box 3 minus Box 4). Box 6 is total sales excluding VAT. Box 7 is total purchases excluding VAT. Box 8 is total supplies to EU (goods only). Box 9 is total acquisitions from EU (goods only).

Most businesses file quarterly, but you can apply for monthly returns if you regularly reclaim VAT (for example, if you are a zero-rated exporter). Monthly filing improves cash flow because you get refunds faster. Annual accounting schemes are also available for smaller businesses, allowing you to make fixed monthly or quarterly payments with a single annual return.

The filing deadline is one month and seven days after the end of the VAT quarter. For example, if your quarter ends on 31 March, the return and payment are due by 7 May. If you pay by Direct Debit, you get an extra three working days. Late filing triggers a default surcharge, and repeated late filing or payment results in increasing penalties.

Step by Step

Throughout the quarter, you record all sales and purchases with their VAT amounts in your accounting software. Your MTD-compatible software maintains a digital record of every VAT transaction. At the end of the quarter, the software calculates the nine boxes of the VAT return from your records.

You review the return figures, checking that sales and purchase totals look reasonable, that the VAT rates applied are correct, and that no transactions have been missed or double-counted. Once satisfied, you submit the return digitally through your software's MTD connection to HMRC. There is no paper filing option for MTD.

If Box 5 shows a positive amount, you owe HMRC and must pay by the deadline. Payment methods include Direct Debit, bank transfer, or corporate credit card. If Box 5 is negative, you are due a refund, which HMRC typically processes within 10 working days (though it can be delayed if HMRC decides to verify your claim). For significant refund claims, HMRC may request supporting documentation before releasing the payment.

Practical Tips

Set up a Direct Debit for VAT payments -- you get three extra working days and avoid the risk of missing the payment deadline
Reconcile your VAT return to your accounting records before submitting -- check that Box 6 (total sales) matches your revenue and Box 7 (total purchases) matches your costs
Keep a separate VAT savings account and transfer the approximate VAT due after each invoice is paid -- this prevents cash flow surprises at quarter end
Review your VAT scheme annually -- the standard scheme, Flat Rate Scheme, cash accounting, and annual accounting all suit different business types

Common Mistakes to Avoid

Missing the filing deadline and triggering the default surcharge -- set calendar reminders at least two weeks before the due date
Reclaiming VAT on non-business purchases or items that are specifically blocked (such as business entertainment or new cars)
Not reconciling the VAT return figures back to your bank statements and sales records, leading to cumulative errors
Forgetting to account for the reverse charge on services purchased from overseas suppliers, which must be included in both Box 1 and Box 4

Frequently Asked Questions

What happens if I file my VAT return late?

HMRC operates a points-based penalty system (from January 2023). You receive a penalty point for each late submission. Once you reach the threshold (4 points for quarterly filers), you receive a £200 penalty for that late return and every subsequent one until you bring your compliance up to date.

Can I claim VAT on purchases made before VAT registration?

Yes, you can reclaim VAT on goods purchased up to four years before registration (if still on hand) and services purchased up to six months before registration. Keep the original VAT invoices as evidence.

What is the Flat Rate Scheme and should I use it?

The Flat Rate Scheme lets you pay a fixed percentage of your gross turnover to HMRC instead of calculating VAT on each transaction. It simplifies record-keeping and can save money if your input VAT is low. It suits businesses with few purchases but high VAT-able turnover.

Do I need to keep VAT invoices?

Yes, you must keep VAT records for at least six years. This includes sales and purchase invoices, VAT account records, and copies of submitted VAT returns. MTD also requires you to maintain digital records of all VAT transactions.

What is the reverse charge for VAT?

The reverse charge applies when you buy certain services from overseas or specific domestic supplies like construction services. Instead of the supplier charging you VAT, you account for it yourself by including it as both output VAT and input VAT on your return, resulting in no net cost if you are fully taxable.

Source: HMRC VAT guidance: https://www.gov.uk/vat-returns and VAT Notice 700/12 (filling in your VAT return): https://www.gov.uk/guidance/how-to-fill-in-and-submit-your-vat-return-vat-notice-70012

Related Terms

VAT (Value Added Tax)

VAT is a tax added to most goods and services sold in the UK. Businesses collect it from customers and pay it to HMRC, minus any VAT they've paid on business purchases.

Making Tax Digital (MTD)

Making Tax Digital is HMRC's initiative requiring businesses to keep digital records and submit tax information using compatible software.

Input VAT

Input VAT is the VAT you pay on business purchases. You can usually reclaim this from HMRC on your VAT return.

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