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How to file VAT Returns Online with HMRC

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Sumit Agarwal Sumit Agarwal 12 Mar 2024 VAT return

How to file VAT returns online with HMRC: A step-by-step Guide

If you’re just starting your business, there are many things to consider. Value Added Tax (VAT) is a consumption tax levied on goods and services at each stage of the supply chain, with the ultimate burden falling on the end consumer. In the United Kingdom, VAT plays a crucial role in generating revenue for the government and regulating economic activities. Understanding VAT is essential for businesses to comply with tax regulations and manage their finances effectively.

What is VAT?

VAT, or Value Added Tax, is a type of indirect tax that is added to the value of goods or services at each stage of their production or distribution. In simpler terms, it's like a sales tax but applied at multiple stages of the supply chain. In the UK, VAT is currently set at different rates for various goods and services. When you buy something, the price you pay includes VAT, which is then collected by businesses and passed on to the government. Understanding VAT can help you make informed decisions about your purchases and budgeting, as it affects the final price you pay for goods and services in the UK.

What is the purpose of VAT?

The primary purpose of VAT is to generate revenue for the government by taxing consumption. Unlike direct taxes such as income tax, which are levied on individuals or businesses, VAT is collected throughout the supply chain, making it a more efficient and equitable way to raise funds. VAT also helps prevent tax evasion and fraud by creating a transparent system of taxation that can be easily monitored and enforced.

Importance of VAT in the UK

VAT is important for businesses in the UK. It brings in money for the government, makes taxes fairer, keeps the economy steady, encourages businesses to follow rules, helps with global trade, and can be used to guide people's choices and support important policies.

  1. Revenue generation
    VAT is one of the largest sources of revenue for the UK government, contributing significantly to public finances and funding essential services such as healthcare, education, and infrastructure.

  2. Economic stability
    By providing a stable and predictable source of income, VAT helps ensure financial stability and sustainability in government budgets, enabling long-term planning and investment.

  3. Fairness
    VAT is considered a fair tax as it is based on consumption rather than income, ensuring that individuals contribute to public services based on their spending habits rather than their earnings.

  4. International trade
    VAT plays a crucial role in international trade by harmonising tax systems across countries and preventing double taxation, making it easier for businesses to engage in cross-border transactions.

  5. Incentivising compliance
    The self-assessment nature of VAT encourages businesses to maintain accurate records, comply with tax regulations, and file timely returns, promoting transparency and accountability in financial reporting.

  6. Supporting small businesses
    The VAT registration threshold allows small businesses to operate without charging VAT until they reach a certain turnover threshold, providing them with a competitive advantage and room for growth.

Value Added Tax (VAT) is a fundamental component of the UK's tax system, serving as a key revenue generator, promoting economic stability, ensuring fairness in taxation, facilitating international trade, incentivising compliance, and supporting small businesses. Understanding how VAT works and fulfilling obligations such as filing accurate VAT returns are essential for businesses to navigate the complexities of taxation and contribute positively to the economy.

How does VAT work in the UK?

Value Added Tax (VAT) is a consumption tax levied on goods and services at each stage of the supply chain. In the UK, VAT plays a significant role in generating revenue for the government and is a crucial aspect of business operations. Understanding how VAT works in the UK is essential for businesses to comply with tax regulations and manage their finances effectively.

VAT Registration Threshold

  1. Threshold Increase: The VAT registration threshold in the UK will rise from £85,000 to £90,000 starting from April 1, 2024.

  2. Voluntary Registration: Businesses can voluntarily register for VAT even if their turnover is below the threshold, allowing them to reclaim VAT on purchases and enhance their credibility.

  3. Benefits of Registration: VAT registration enables businesses to charge VAT on sales, reclaim VAT on purchases, improve credibility, and facilitate trading within the EU.

  4. Penalties for Non-Registration: Failure to register for VAT when required can lead to penalties from HMRC, emphasising the importance of monitoring turnover.

  5. De-registration Threshold: The de-registration threshold will also increase from £83,000 to £88,000 as of April 2024.

  6. Impact on Contractors: The increase in the VAT threshold to £90,000 is seen as a positive change for contractors, reducing administrative burden and providing more flexibility in managing VAT-related processes.

  7. Economic Productivity: Chancellor Jeremy Hunt highlighted that investing in economic productivity is crucial, with measures like increasing the VAT threshold aimed at benefiting start-ups and SMEs.

  8. Frozen Thresholds: The VAT registration and de-registration thresholds will remain at £85,000 and £83,000 respectively until March 31, 2026.

Charging VAT on sales

  1. VAT rates: In the UK, there are different rates of VAT applicable to various goods and services. The standard rate is 20%, but there are reduced rates (5% and 0%) for specific items like children's car seats and certain food items.

  2. Inclusive vs. exclusive pricing: Businesses must display whether prices include VAT or not. When pricing products or services, they need to calculate the VAT amount separately if it's not included in the displayed price.

  3. Issuing VAT invoices: When making sales subject to VAT, businesses must issue VAT invoices to their customers. These invoices should include specific details such as the amount of VAT charged, total amount payable including VAT, and the seller's VAT registration number.

  4. VAT margin scheme: For certain second-hand goods like antiques or art, businesses can use the margin scheme where they pay VAT only on the difference between what they paid for an item and what they sold it for.

  5. Digital services: Businesses selling digital services to consumers in other EU countries need to comply with specific rules under the Mini One Stop Shop (MOSS) scheme.

Reclaiming VAT on purchases

  1. Input tax: Businesses can reclaim the VAT they have paid on purchases related to their business activities. This includes goods, services, equipment, and other expenses incurred in running the business.

  2. VAT invoices: To reclaim input tax, businesses must have valid VAT invoices from their suppliers showing the amount of VAT paid.

  3. Partial exemption: In cases where a business makes both taxable and exempt supplies, it may be partially exempt from reclaiming all input tax.

  4. Capital goods scheme: For large capital investments like property or equipment, businesses may need to account for input tax over several years using the Capital Goods Scheme.

  5. VAT flat rate scheme: Some small businesses may opt for the Flat Rate Scheme where they pay a fixed percentage of their turnover as VAT rather than accounting for input tax separately.

Submitting VAT returns

  1. Frequency of returns: Businesses registered for VAT must submit periodic returns to HMRC detailing their sales, purchases, and amount of VAT owed or reclaimed.

  2. Online filing: HMRC encourages businesses to file their VAT returns online through its Making Tax Digital (MTD) platform.

  3. Deadlines: The deadline for submitting a return and paying any outstanding tax is usually one month and seven days after the end of each accounting period.

  4. Adjustments: Businesses may need to make adjustments in their returns for factors like bad debts or partial exemption calculations.

  5. Penalties: Late submission or payment of VAT returns can result in penalties from HMRC, so businesses need to meet deadlines and ensure accuracy in their filings.

Understanding how Value Added Tax works in the UK is crucial for businesses to comply with tax regulations and effectively manage their finances while ensuring smooth operations within legal boundaries.

How to file VAT returns online with HMRC?

Filing VAT returns online with HMRC is a crucial process for businesses in the UK to report their VAT liabilities and claim any VAT refunds. Here are 10 commonly used steps to file VAT returns online efficiently.

Step 1: Ensure you are registered for VAT

Before proceeding with filing your VAT return online, it is imperative to confirm that you are registered for VAT with HMRC. Having a valid VAT registration number is a prerequisite for engaging in the online filing process. If you are not yet registered for VAT, you must complete the registration process with HMRC to obtain your unique VAT registration number. Ensuring proper registration is fundamental to complying with tax regulations and facilitating the seamless submission of your VAT returns.

Step 2: Gather necessary information

Gathering necessary information is essential for filing VAT returns accurately. Collect all financial records, such as sales and purchase invoices, to calculate your VAT liability or refund correctly. Detailed documentation ensures compliance with HMRC regulations and helps in providing a clear overview of your business transactions. Organising these records systematically will streamline the VAT return filing process and facilitate efficient reporting of your financial obligations.

Step 3: Access your HMRC online account

To access your HMRC online account for filing VAT returns, log in using your Government Gateway credentials. Navigate to the VAT services section to initiate the VAT return filing process. Ensure you have your login details ready and follow the steps outlined on the UK government website. Remember, you can only use the government's VAT online account if you are part of the annual accounting scheme. Filing your return by post is permitted only with an exemption from Making Tax Digital for VAT. Stay informed about your VAT deadlines and ensure timely submission to avoid penalties.

Step 4: Select the correct VAT period

When selecting the VAT period for filing your return, ensure accuracy by choosing the correct dates. This step is crucial to avoid discrepancies in your submission. Align the period with your business's accounting cycle and HMRC's requirements. Double-check the start and end dates to accurately report your sales, purchases, and VAT liabilities or refunds for the specified period.

Step 5: Enter your sales figures

Input your total sales figures for the period, encompassing both standard-rated and zero-rated sales. It is essential to double-check the accuracy of these figures before proceeding further. Ensuring precision in reporting your sales data is crucial for calculating your VAT liability or refund correctly. Take the time to review and verify these numbers to avoid errors in your VAT return submission.

Step 6: Input your purchase figures

Input your total purchase figures, incorporating any input tax eligible for reclamation on business expenses. Ensure all invoices and receipts are included for accurate reporting. By meticulously recording and including these details, you can maximise your input tax reclaims and ensure compliance with HMRC regulations. Proper documentation of purchases is essential for a thorough and precise VAT return submission.

Step 7: Calculate your VAT liability or refund

HMRC's online system simplifies the process by automatically computing your VAT liability or refund using the data you input. It is essential to carefully review the calculated amount to ensure its accuracy. By verifying the figures, you can confirm that your VAT return accurately reflects your financial transactions, helping you avoid errors and comply with tax regulations effectively.

Step 8: Submit your VAT return

Once you have carefully reviewed and verified all the information in your VAT return for accuracy, proceed to submit it electronically via HMRC's online portal. Confirming the submission finalises the process, ensuring timely reporting of your VAT liabilities or refund to HMRC.

Step 9: Make payment (if applicable)

If you have a VAT liability for the period, ensure timely payment to HMRC by the specified due date in your online account. Failure to pay on time can lead to penalties, interest charges, and potential disruptions to your business operations. Utilise HMRC's approved payment methods and keep records of all transactions for future reference and compliance.

Step 10: Keep records of your submission

After submitting your VAT return online, maintain copies of essential documents such as confirmation of submission, payment receipts, and any correspondence with HMRC. Organised record-keeping is vital for audit purposes, ensuring transparency, accuracy, and ease of access to information when needed. Proper documentation also aids in resolving any discrepancies that may arise in the future.

By following these 10 steps when filing your VAT returns online with HMRC, you can streamline the process, minimise errors, and maintain accurate reporting of your business's VAT liabilities. Compliance with HMRC requirements is key to avoiding penalties and fostering a positive relationship with tax authorities.

If you need any help with VAT return services, dns accountants can assist you in filing your VAT returns seamlessly. Our expert advisors provide comprehensive packages tailored to your business needs, ensuring accurate and timely submission of your VAT returns. From calculating your VAT liability to submitting the returns online with HMRC, we handle the entire process efficiently. Contact us today at 033 0088 3616, email contact@dnsaccountants.co.uk, or book a free consultation for expert assistance. Let us simplify your VAT return filing process and ensure compliance with HMRC regulations, allowing you to focus on growing your business with peace of mind.

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About the author

Sumit Agarwal
Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants