What Are VAT Returns?

VAT Returns Explained

A VAT return is a form submitted to HMRC that reports how much VAT your business has charged on sales (output tax) and how much VAT it has paid on purchases (input tax) during a specific period. The difference between the two determines whether you owe HMRC money or are entitled to a refund.

All VAT-registered businesses must submit VAT returns, regardless of whether they have made any sales or purchases during the period.

How Often Are VAT Returns Filed?

Most businesses file VAT returns quarterly. HMRC assigns you a stagger group when you register for VAT, which determines your quarterly periods:

Other filing frequencies:

• Monthly — available by request, useful for businesses that regularly reclaim more VAT than they pay (for example, exporters)
• Annually — available under the Annual Accounting Scheme for businesses with turnover below £1.35 million

The Nine Boxes

A VAT return consists of nine boxes:

Box 5 is the key figure — if it is positive, you owe HMRC. If it is negative, HMRC owes you a refund.

Calculating Output Tax (Box 1)

Output tax is the VAT you charge on your sales. For each sale, identify the correct VAT rate:

Exempt supplies are not included in the VAT return calculations (they are outside the scope of VAT), but they can affect your ability to reclaim input tax.

Calculating Input Tax (Box 4)

Input tax is the VAT you pay on business purchases. You can reclaim VAT on purchases that are used for making taxable supplies (standard, reduced, or zero-rated).

Conditions for Reclaiming Input Tax

To reclaim input VAT, you need:

• A valid VAT invoice showing the supplier’s VAT number, the VAT amount, and a description of the goods or services
• The purchase must be for business use
• The expense must be an allowable business cost

Blocked Input Tax

Some input tax cannot be reclaimed:

• VAT on business entertainment
• VAT on cars (unless used exclusively for business, such as taxis or driving schools)
• VAT on goods and services used for making exempt supplies
• VAT on purchases without a valid VAT invoice

Partial Exemption

If your business makes both taxable and exempt supplies, you are partially exempt. You can only reclaim input tax relating to your taxable supplies. A partial exemption method (usually the standard method) is used to calculate the reclaimable proportion.

Under the de minimis rules, if your exempt input tax is less than £625 per month on average and less than 50% of total input tax, you can treat it all as reclaimable.

Filing Deadlines

VAT returns must be filed, and any payment made, by the 7th day of the second month following the end of the VAT period. For example:

If you pay by direct debit, you get an additional 3 working days. HMRC collects the payment automatically about 3 days after the deadline.

How to File

Under Making Tax Digital , all VAT-registered businesses must submit their returns through MTD-compatible software. You cannot file through the HMRC online portal.

The process:

1. Record all sales and purchases in your accounting software
2. The software calculates the nine boxes automatically
3. Review the figures for accuracy
4. Submit the return to HMRC through the software’s API connection
5. Receive confirmation from HMRC

Payment Methods

VAT payments can be made by:

• Direct debit — set up through HMRC’s online services (recommended)
• Bank transfer (Faster Payments, CHAPS, or Bacs)
• Online or telephone banking
• Corporate credit card (through BillPay)

Cheques are no longer accepted for VAT payments.

VAT Refunds

If your input tax exceeds your output tax (Box 5 is negative), HMRC will refund the difference. This commonly happens when:

• You export zero-rated goods
• You have made large capital purchases
• You have more reduced or zero-rated sales than standard-rated sales

HMRC aims to process refunds within 30 days of receiving the return. However, HMRC may conduct a verification check before releasing large or unusual refunds, which can delay payment.

Adjustments and Corrections

Errors on Previous Returns

If you discover an error on a previous VAT return:

• Errors up to £10,000 (or 1% of turnover up to £50,000): Correct on the next VAT return by adjusting the relevant boxes
• Errors above £10,000 (and more than 1% of turnover): Must be reported to HMRC separately using form VAT652

Deliberate errors must always be disclosed to HMRC regardless of value.

Credit Notes

When you issue or receive a credit note, adjust the output or input tax in the period the credit note is issued.

Bad Debt Relief

If a customer does not pay an invoice and the debt is more than 6 months old and has been written off in your accounts, you can reclaim the output VAT through bad debt relief. This is claimed on the VAT return for the period in which the 6-month condition is met.

Special VAT Schemes

Several schemes affect how VAT returns are prepared:

Penalties

VAT penalties follow the points-based system introduced in January 2023:

Late Submission

• Each late return adds 1 penalty point
• At 4 points (quarterly filers), a £200 penalty is charged for each subsequent late return
• Points expire after 24 months of on-time filing (quarterly filers)

Late Payment

Record Keeping

VAT records must be kept for at least 6 years. Records include:

• All sales and purchase invoices
• Credit and debit notes
• Import and export documentation
• Records of goods taken for personal use
• Records of any adjustments or corrections

Proper accounting records are essential for accurate VAT returns and for satisfying HMRC in the event of a compliance check. Under MTD, these records must be maintained digitally using compatible software.