How to do a VAT return
Value Added Tax (VAT) is a tax that’s added to some of the things we buy.
When you’re the customer, it’s normally added automatically to the price you see and pay. But as a business owner, it’s something you may need to think about for the products (called goods) and services you buy and sell as part of running your business.
Here, we’ll explain things like when you need to start adding VAT, and if you’ll need to do a VAT return.
When and how to add VAT
‘Turnover’ is the money your business makes, before you pay any expenses or tax.
Key thing to remember:
You only need to start adding VAT – and doing a VAT return – when you earn more than £90,000 as turnover in a rolling 12-month period.
How to register for VAT
Step 1: You need to register your business with us for VAT on GOV.UK. We’ll then send you a VAT registration number (VRN)
Step 2: Once you get your VRN, you need to start adding VAT onto the price of any goods or services you sell. The current standard rate of VAT is 20%.* So you need to add 20% onto the price you were charging
Step 3: Keep hold of the extra 20% you get paid, as you’ll need to pay this to us in tax when you do your VAT return
*Some goods and services have different VAT rates. You can find out more on GOV.UK.
Here’s an example:
George was charging customers £100 for plumbing call-outs.
He has started earning £90,000 turnover in a year.
He now needs to charge customers £100 with the 20% VAT added, making the full amount £120.
Helpful tip:
You need to register for VAT within 30 days of reaching the £90,000 turnover. So if it’s looking like you’ll earn more than this in the next 30 days, you should register now.
You can’t include VAT on your invoices until you get your VAT registration number. But you can increase your prices to cover the VAT you’ll need to pay.
What being VAT-registered means
Once you’re VAT-registered you’ll need to tell us how much VAT you’ve charged your customers – and how much VAT you’ve paid when buying things for your business.
Key thing to remember:
You do this by filling in and sending us a VAT return. You’ll usually need to do one every 3 months.
It might sound tricky, but it’s really just a list of what you’ve sold and bought.
What is a VAT return?
Whether you’re a sole trader or you own a limited company but still pay Income Tax, you’re probably familiar with doing a tax return to tell us your income each year.
A VAT return is a separate type of tax return you’ll also need to do if you’re a VAT-registered business. It helps us work out if you’ve paid too little or too much tax.
On your VAT return, you’ll need to tell us the VAT owed on the full value of anything you sell. This is even if a customer pays their bill by giving you something other than money in what’s called a ‘part-exchange’.
Here’s an example:
John is a mechanic. Syed is an electrician.
John fixes Syed’s van. It would usually cost £200, with £40 VAT on top – so £240 in total.
Syed pays John £140. He pays the rest of his bill (£100) by sorting out some rewiring in John’s garage.
John needs to record the full £40 VAT on his VAT return.
Key thing to remember:
You can claim back the VAT on things you buy for your business (called expenses). So, if you’ve paid more VAT on your business expenses than the VAT you’ve charged customers, we’ll refund you the difference.
Here’s how that might work:
Let’s say you charged your customers £15,000 VAT.
But you spent £18,000 in VAT on business expenses.
As you spent more on VAT than you charged, we’ll pay you back £3,000.
When you fill out your VAT return, you’ll need some numbers to hand:
- the total figure for everything your business has sold
- the total figure for everything your business has bought
- the VAT you’ve charged customers
- the VAT you’ve paid on things bought for your business
- the overall total that shows if you owe us any money, or we owe you
Send us your VAT return online
Most business owners keep records and send us VAT returns using software that works with our Making Tax Digital for VAT service. You can find out more about Making Tax Digital for VAT on GOV.UK.
Most VAT periods are quarterly, which means you’ll need to do a VAT return once every 3 months.
You need to send us your VAT return and pay any tax you owe no later than 1 month and 7 days after your VAT period ends. If you don’t, you may be charged a penalty.
So, if your VAT period ends on 31 March, the deadline would be on or before 7 May.
An accountant or agent can help you
You don’t have to do it all on your own. Many small business owners use an accountant or tax agent to manage their VAT. They can work out and send VAT returns for you. They can also help you claim back any VAT you’re owed. Getting expert support can give you peace of mind, but you should always check your tax returns yourself. It’s still down to you to make sure everything’s correct.
Missing deadlines can cost you money
One of the benefits of using an accountant or tax agent is keeping on top of deadlines.
We use a points system for any VAT returns that are sent in late. Each one adds a point to your account. Once you reach your limit, you’ll get a £200 penalty.
You can find out more about the penalties for sending us your VAT return late on GOV.UK.
With late payments, things work differently.
The penalty you’ll pay for being late is not a fixed amount. Instead, it depends on how much VAT you owe and how late you pay it. It’s important to know that you’ll also owe us interest on any late payments.
Key thing to remember:
If you pay more than 15 days late, you’ll get a penalty of around 3% of the VAT you owe. After 30 days, this goes up and the interest starts to grow day by day.
You can find out more about our late payment penalties on GOV.UK.
Handle your VAT returns like a pro
The best way to stay on track is to keep good records. It’s also useful to put deadline reminders on your phone or computer.
If you’re finding it hard to pay on time, we may be able to work out a payment plan to spread the cost, which may help you lower or even avoid any penalties. You can find out more about setting up a payment plan on GOV.UK.
And remember, even if you can’t pay the tax you owe straight away, doing your VAT returns on time can stop you racking up penalty points.
If you need any support, we’re always here to help you.
The information and resources on this site should help you get confident with the basics of tax, but you should always check the detailed guidance on GOV.UK for more help on doing your VAT Return.