Resource 2

VAT Returns Explained

VAT

You usually submit a VAT Return to HM Revenue and Customs (HMRC) every 3 months.

This period of time is known as your ‘accounting period.’

The VAT Return records things for the accounting period like:

  • Your total sales and purchases
  • The amount of VAT you owe
  • The amount of VAT you can reclaim
  • What your VAT refund from HMRC is

You must submit a VAT Return even if you have no VAT to pay or reclaim.

Get Email Reminders

Sign up to get a reminder when your VAT Return is due.

Log in to your online account to add your email address by following the link next to ‘VAT messages’.

Final VAT Returns

You have to submit a final VAT Return when you cancel your VAT registration. You can usually do this online using your VAT online account.

HMRC will send you a paper version to complete if your registration is cancelled because you’re insolvent.

Fill In Your Return

Complete and send your VAT Return online.

If you need help there’s guidance on:

https://www.gov.uk/guidance/how-to-fill-in-and-submit-your-vat-return-vat-notice-70012#section3

You must include EU sales on your VAT return and complete an EC Sales List.

Working Out What You Can Claim

If your business is a charity, you pay VAT at a reduced rate on some goods and services.

VAT-registered businesses can usually reclaim the VAT they’ve paid on business purchases and expenses. The claim must be for a business activity (you have to work out the business element if it also had a personal use).

You must keep records to support your claim and show the VAT was paid.

Exceptions

You cannot reclaim the VAT on:

There are special rules for working out how to reclaim VAT for:

Estimated Figures

Ask HM Revenue and Customs (HMRC) for permission to use estimated figures. You’ll need a good reason why you cannot give accurate figures on your VAT Return.

If you’re allowed, you will not be charged a penalty unless you miss the deadline or make a careless or deliberate error. You’ll normally have to give the correct figures in your next VAT Return.

Bad Debts

You can reclaim the VAT you’ve paid HMRC but not received from a customer if it’s a ‘bad debt’ (one you’ve written off). To qualify for the relief:

the debt must be between 6 months old and 4 years and 6 months old

  • You must not have sold the debt on
  • You must not have charged more than the normal price for the item

You should reclaim them via your VAT Return (add them to your Box 4 figure) and keep records about the debt.

If the debt is paid, you must pay the relief back via your VAT Return by adding the amount to your ‘Box 1’ figure.

You must submit your return online unless:

  • Your business is subject to an insolvency procedure - if you have a Company Voluntary Arrangement or an Individual Voluntary Arrangement you can submit your return online if you want to
  • You object to using computers on religious grounds
  • You cannot because of your age, a disability or because of where you live, for example you do not have internet access

Contact HM Revenue and Customs HMRC to find out how to submit your return, for example paper filing, if you cannot submit online.

You can get help with your VAT return or if you do not understand something about your tax.

Submit Your VAT Return Online

You need a VAT number and a VAT online account. You can then submit your VAT Return using HMRC’s free online service or commercial accounting software.

Getting Online

If you need:

Log in to your VAT online account and complete your VAT Return.

USING ACCOUNTING SOFTWARE

Most accounting software lets you submit your VAT Return to HMRC directly. This means you will not have to enter your figures separately in HMRC’s online service.

HMRC has a list of software you can use to submit your VAT Return.

Keep any reference number you receive as proof you’ve sent your return.

Using Accountants Or Agents

You’ll need to authorise them before they can submit your VAT Return. You can do this through your VAT online account.

Find an accountant or a solicitor to help you with your VAT return or tax.

Help With Online Services

Contact the VAT Online Services Helpdesk if you need any help using VAT online services.

Check your VAT Return and payment deadlines in your VAT online account.

Your VAT online account tells you:

  • When your VAT Returns are due
  • When the payment must clear HM Revenue and Customs’ (HMRC) account

The deadline for submitting the return online and paying HMRC are usually the same - 1 calendar month and 7 days after the end of an accounting period. You need to allow time for the payment to reach HMRC’s account.

Exceptions

The deadlines are different if, for example, you use the VAT Annual Accounting Scheme.

Pay Your VAT Bill

You must pay VAT to HMRC electronically, for example through direct debit or internet banking. Most businesses are not allowed to pay by cheque.

Contact HMRC if you cannot pay your VAT bill.

HM Revenue and Customs (HMRC) record a ‘default’ if:

  • They do not receive your VAT return by the deadline
  • Full payment for the VAT due on your return has not reached their account by the deadline

Surcharges

You may enter a 12-month ‘surcharge period’ if you default. If you default again during this time:

  • The surcharge period is extended for a further 12 months
  • You may have to pay an extra amount (a ‘surcharge’) on top of the VAT you owe

If you submit a late return, you will not have to pay a surcharge if you:

  • Pay your VAT in full by the deadline
  • Have no tax to pay
  • Are due a VAT repayment

HM Revenue and Customs (HMRC) will write to you explaining any surcharges you owe and what happens if you default again.

How Much You Pay

Your surcharge is a percentage of the VAT outstanding on the due date for the accounting period that is in default. The surcharge rate increases every time you default again in a surcharge period.

This table shows how much you’ll be charged if you default within a surcharge period.

You do not pay a surcharge for your first default.

Defaults within 12 monthsSurcharge if annual turnover is less than £150,000Surcharge if annual turnover is £150,000 or more

2nd

No surcharge

2% (no surcharge if this is less than £400)

3rd

2% (no surcharge if this is less than £400)

5% (no surcharge if this is less than £400)

4th

5% (no surcharge if this is less than £400)

10% or £30 (whichever is more)

5th

10% or £30 (whichever is more)

15% or £30 (whichever is more)

6 or more

15% or £30 (whichever is more)

15% or £30 (whichever is more)

Penalties

HMRC can charge you a penalty of up to:

  • 100% of any tax under-stated or over-claimed if you send a return that contains a careless or deliberate inaccuracy
  • 30% of an assessment if HMRC sends you one that’s too low and you do not tell them it’s wrong within 30 days
  • £400 if you submit a paper VAT Return, unless HMRC has told you you’re exempt from submitting your return online

Assessments

If you do not send your VAT Return and pay any VAT due on time, you will get a ‘VAT notice of assessment of tax’ from HM Revenue and Customs (HMRC), telling you how much VAT they think you owe.

What you need to do

Send your VAT Return and any payment due immediately.

If the assessed amount of VAT is too low you must tell HMRC within 30 days. Do this by sending a correct VAT Return and VAT payment or contacting them. You may be charged a penalty if you do not.

If the assessment is too high, you cannot appeal it. You must send a correct VAT Return and VAT payment.

Interest On Underpaid Or Overpaid VAT

HM Revenue and Customs (HMRC) may charge you interest if you do not report and pay the right amount of VAT. If you pay too much VAT because HMRC make a mistake, you can claim interest.

When Interest Is Charged

Interest may be charged if you:

  • Report less VAT than you charge, or reclaim more than you pay
  • Pay an assessment that HMRC later find was too low
  • Let HMRC know you owe them VAT because of a mistake on your VAT Return

You’ll be charged 3% interest.

There’s a different interest rate for tax that was underpaid before 21 November 2017.

Use your VAT online account to check the amount you owe.

HMRC will also send you a notice telling you how much you owe and how it’s worked out.

If you do not pay within 30 days, further interest is charged on the VAT due from the date of the notice. You’ll be charged interest for as long as you do not pay, up to a maximum of 2 years.

You cannot deduct the interest HMRC charges you when working out your taxable profits.

Claiming Interest

You may be able to claim interest if HMRC’s mistake means:

  • You pay too much VAT
  • You reclaim too little VAT
  • A payment to you from HMRC was delayed

Normally HMRC will not repay interest if you’ve paid too much VAT because of a mistake you made.

You can claim 0.5% interest. This is normally paid for the whole period from when the VAT was overpaid or reclaimed until the date repayment is authorised.

There’s a different interest rate for tax that was overpaid before 29 September 2009.

If you caused a delay to any payments (for example by not claiming straight away) HMRC might leave this time out.

You have to claim the interest separately from the repayment itself.

Write to HMRC with details of the repayment, explaining why you’re owed interest. You must do this within 4 years of the repayment’s authorisation date. Use the postal address on the VAT correspondence you have from HMRC.

Any interest you get from HMRC counts as taxable income.

Paying Interest To Your Customers

You must pay any of the interest you get (as well as the VAT) to your customers if HMRC’s mistake means they paid too much VAT.

Contact the person at HMRC who dealt with your claim if you need to find out how the interest was calculated. This can help you work out how much you need to repay each customer. You must give the money back to HMRC within 14 days if you cannot get in touch with a customer to repay them.

Interest Rates

HMRC only charge or pay simple interest (interest on the original amount, not interest on interest).

Challenging An HMRC Decision

You cannot appeal the decision to charge you interest but you can challenge the actual amount.