HMRC VAT returns: an introduction for UK businesses

This article was written by The Accountancy Partnership – UK based online accountancy service.

There are various thresholds, deadlines, rules, and regulations that come into play around VAT, so trust us when we say you’re not alone in feeling a little overwhelmed by it. And that’s before you start crossing borders and bring import and export VAT into play.

Even the most seasoned of VAT veterans still lean on the support of qualified accountants when it comes to managing their VAT and returns submissions.

So, in this article, we aim to provide you with a concise intro to VAT reclaims, covering all the high-level essentials you need to know about before getting started.

How does VAT work?

Once the taxable turnover of your business reaches £85,000, you’ll need to register it for VAT. This means that you must then charge VAT on taxable goods and services. The amount of VAT is worked out at a percentage of the taxable sale. This is referred to as ‘output tax’.

Selling

There are different rates of VAT, but the most common one, called standard VAT, is charged at a rate of 20%. For example, if you sell a taxable item for £100, you must then charge VAT by adding a further 20% of that amount to the sale. The amount you charge to the customer is then £120.

You can also choose to keep the sale price as £100, and then pay the £20 VAT yourself, out of the profit you make on the sale. This can help keep existing customers happy, but also means you’re making less profit.

Buying

If you make a purchase from another VAT-registered business, you will be charged VAT by them. So, when the shoe is on the other foot, it’s known as ‘input tax’.

Your HMRC VAT return

You will need to calculate how much input tax you have paid to your suppliers, and then subtract this from the output tax that you collect from your own customers.

You’ll report this information to HMRC every three months (your accounting period).

• If you pay more tax to suppliers than you collect from customers, you’ll be able to reclaim the difference.

• If you collect more than you to suppliers, you’ll need to pay the difference to HMRC.

Alternatively, if your VAT taxable turnover stays below £150,000, you can register for a flat rate scheme instead. This allows you to pay a fixed percentage to HMRC, rather than having to do the output minus input calculation.

VAT invoices

A VAT invoice is something a business issues when it wants to charge VAT or reclaim VAT that is charged to them.

Some important things to note about VAT invoices:

• Only VAT-registered businesses can issue this type of invoice.

• VAT invoices are only compulsory if your customer is also VAT-registered.

• Businesses that aren’t registered for VAT should only issue standard invoices (without output tax applied).

When it comes to VAT invoices, there are some hoops you need to jump through in order to make sure they’re fully HMRC-compliant.

A VAT invoice must include

• Business name

• Registered address

• Your VAT number

• The customer’s name and address

• A unique invoice number

• Issue date

• Date of supply

• Goods and/or services description

• Quantity per item

• Price per item (excluding VAT)

• Rate of VAT per item

• Any discounts applied

• Total amount due (excluding VAT)

• Total sum of VAT due

When does a business need to register for VAT?

Compulsory registration comes into action when a business’s VAT taxable turnover exceeds the current threshold, which, as it stands right now, is £85,000.

So, if you know your VAT taxable turnover (the sum of everything sold that is NOT exempt from VAT) is going to surpass that limit, it’s time to get VAT registered.

You will need to register for VAT if:

• You know your VAT taxable turnover is going to be more than £85,000 in the next 30 days.

• Your business had a VAT taxable turnover of more than £85,000 during the last 12 calendar months.

This legally applies to all traders – sole traders, partnerships, and limited companies alike. It is possible to apply for a registration exception if your taxable turnover goes over the threshold temporarily.

Can you register voluntarily?

Some people will choose to register their business for VAT on a voluntary basis.

• Tax saving opportunities for customers who can reclaim VAT themselves.

• It can help the business appear larger and more established than it is.

• If you regularly pay more tax to suppliers than you charge to customers (for instance, if you sell goods and services which are not VAT taxable but pay a lot of VAT on business supplies), registering for VAT means you can reclaim the difference.

Postponed VAT and new VAT rules post-Brexit

As of the 1st January 2021, VAT-registered businesses that import goods into the UK from anywhere in the world can now use a system known as ‘postponed VAT’.

Postponed VAT allows registered businesses to account for import VAT on their VAT Return, rather than having to pay it as soon as the goods reach the UK border. The system is designed to negate any impact on cash flow when importing goods.

Customs declarations and the payment of any other necessary duties will still be required.

Since the beginning of 2021, businesses now require an EORI number to export goods out of the UK, and will also need to know the EU EORI number for any European businesses they are exporting to.

Whoever the UK businesses is exporting to within the EU will need to pay tax on whatever it is they’re importing.

You’ll be glad to know, if you didn’t already, that domestic VAT rules remain the same post-Brexit so there’s no need to worry about that. Phew!

The next step: learn how to improve the VAT return process and automate this painful task.