VAT Bookkeeping and Record Keeping

If your business is VAT-registered, you must keep detailed records of all VAT transactions. These records form the basis for your VAT returns and must be available for inspection if HMRC requests them.

Getting VAT bookkeeping right is not optional. Errors lead to incorrect returns, which lead to penalties, interest charges and time-consuming corrections.

What records HMRC requires

HMRC requires every VAT-registered business to maintain:

The VAT account

Your VAT account is a summary of the VAT you owe and the VAT you can reclaim. It must show:

• Output VAT charged on sales (the VAT you collect from customers)
• Input VAT on purchases (the VAT you pay to suppliers)
• The net VAT due to or from HMRC for each return period
• Any corrections or adjustments made

The VAT account does not need to be a separate physical record. Most accounting software generates it automatically from your transaction entries.

Sales records

For every sale where VAT is charged, you need:

• A copy of every VAT invoice issued
• Records of any credit notes issued
• A daily summary of cash sales (if applicable)
• Records of goods or services supplied for non-business purposes (which may still be subject to VAT)

Purchase records

For every purchase where you reclaim VAT, you need:

• The original VAT invoice from the supplier
• Records of any credit notes received
• Import documentation for goods imported from outside the UK

Additional records

• Records of goods and services received from overseas (reverse charge may apply)
• Records related to the capital goods scheme (if applicable)
• Records of any exempt or zero-rated supplies
• Records of any partial exemption calculations

VAT invoice requirements

A valid VAT invoice is essential for both charging and reclaiming VAT. The requirements depend on the value of the invoice .

Full VAT invoice (over £250 including VAT)

Simplified VAT invoice (under £250 including VAT)

For smaller transactions, a simplified invoice is acceptable:

• Supplier name and address
• Supplier VAT registration number
• Date of supply
• Description of goods or services
• Total amount including VAT
• VAT rate applied

Modified VAT invoice (over £250 to VAT-registered customers)

Shows the unit price and total including VAT, rather than excluding it. The VAT is shown separately.

VAT rates in the UK

You must apply the correct VAT rate to each transaction:

Getting the rate wrong is one of the most common VAT bookkeeping errors. Zero-rated and exempt supplies are different – zero-rated supplies are taxable (you can reclaim input VAT on related purchases), while exempt supplies are not taxable (and you may not be able to reclaim the related input VAT).

Making Tax Digital and digital records

Since April 2019, all VAT-registered businesses must keep digital records and submit VAT returns using MTD-compatible software .

Digital records means your core VAT data must be stored electronically:

• Your business name, address and VAT registration number
• The VAT accounting scheme you use
• The VAT rate and value of each supply made and received
• The total output VAT and total input VAT for each return period
• Any adjustments to the VAT account

You must use digital links between different parts of your records. If you use a spreadsheet alongside your accounting software, the data must transfer digitally – copy-and-paste is acceptable, but retyping is not.

Recording VAT transactions

Standard purchase with VAT

When you receive a supplier invoice for £600 + £120 VAT:

Standard sale with VAT

When you issue an invoice for £2,000 + £400 VAT:

Reverse charge transactions

For certain services received from overseas suppliers, you must account for VAT under the reverse charge mechanism. You charge yourself VAT on the purchase and simultaneously reclaim it as input VAT (if you are entitled to full recovery).

The net effect on your VAT return is nil if you have full recovery, but both the output and input VAT must appear on the return.

Partial exemption

If your business makes both taxable and exempt supplies, you cannot reclaim all your input VAT. You must apportion your input VAT using a partial exemption method.

The standard method is to calculate the proportion of taxable supplies to total supplies and apply that percentage to your residual input VAT (the input VAT that cannot be directly attributed to either taxable or exempt supplies).

If your exempt input VAT is below the de minimis limits (£625 per month on average and less than 50% of total input VAT), you can reclaim all your input VAT despite making some exempt supplies.

VAT schemes that affect bookkeeping

Flat Rate Scheme

Under the Flat Rate Scheme, you charge VAT at the standard rate on your invoices but pay HMRC a lower fixed percentage of your gross turnover. You cannot reclaim input VAT on purchases (except for capital assets over £2,000).

Your bookkeeping still needs to record the full VAT on sales invoices, but the payment to HMRC is calculated differently.

Cash Accounting Scheme

Under the Cash Accounting Scheme, you account for VAT based on when you receive or make payments, rather than when you issue or receive invoices. This can improve cash flow if your customers are slow to pay.

Your records must still show the invoice date and the payment date so the correct VAT period can be determined.

Annual Accounting Scheme

You submit one VAT return per year instead of four, making interim payments during the year based on estimated VAT liability. The final return settles any difference.

Common VAT bookkeeping mistakes

• Reclaiming VAT without a valid invoice – you need a VAT invoice showing the supplier’s VAT number
• Applying the wrong VAT rate – check each supply carefully, especially food and drink
• Not accounting for reverse charge – missing this on overseas purchases means your VAT return is wrong
• Claiming VAT on exempt items – business entertainment, insurance and financial services are common traps
• Not reconciling the VAT account – compare your VAT return figures to your accounting records before filing
• Late filing – VAT return deadlines are strict and penalties apply from the first default under the new points-based system
• Mixing zero-rated and exempt – they look similar but have very different consequences for input VAT recovery

Record retention

VAT records must be kept for 6 years from the date of the transaction. For the VAT Mini One Stop Shop (MOSS), the retention period is 10 years. See our records retention guide for full details.