Making VAT Returns Easy: Tips and Best Practices

Easy VAT returns are not about luck or clever software. They come from a handful of habits that turn a stressful quarter-end scramble into a 20-minute check. Most of the pain in VAT comes from records that are incomplete, out of date or in the wrong place. Fix that, and filing becomes routine. This guide sets out ten practical habits for easy VAT returns, from how you keep records to the checks worth running before you press submit.

1. Keep digital records from day one

Every VAT-registered business must follow Making Tax Digital (MTD) for VAT. That means keeping your VAT records digitally and filing your returns through MTD-compatible software. Paper records and the old HMRC online form are no longer allowed for filing.

The records you must keep digitally include your business name, address and VAT number, the VAT accounting schemes you use, and for each sale and purchase the date, the value and the VAT rate. If you use spreadsheets, you need bridging software to send the return, and the links between your records and the return must be digital, not copied by hand.

Choosing proper accounting software early is the single biggest step towards easy VAT returns, because it records VAT as you go instead of leaving you to work it out at the end.

2. Connect your bank feed

Most MTD software can pull in your bank transactions automatically. With a live bank feed, every payment in and out appears in your software within a day or two, ready to be matched to an invoice or receipt. Without one, someone has to type in or upload statements, which is slow and easy to get wrong.

Check the connection every month. Bank feeds need to be re-authorised from time to time, and a feed that quietly stopped two months ago is a common cause of a rushed return.

3. Snap receipts the day you get them

You can only reclaim VAT if you hold a valid VAT invoice or receipt. Faded till receipts and lost emails cost businesses money every quarter. Most accounting software has an app that lets you photograph a receipt and attach it to the transaction straight away. Make it part of the purchase: pay, photograph, done.

What a valid VAT invoice shows

• the supplier's name, address and VAT number
• an invoice number and date
• a description of the goods or services
• the amount before VAT, the VAT rate and the VAT charged

For purchases of £250 or less including VAT, a simplified invoice with fewer details is acceptable.

4. Reconcile every month, not every quarter

The habit that does most for easy VAT returns is a monthly reconciliation: matching every bank transaction to its invoice or receipt and making sure nothing is missing. Done monthly, it takes minutes. Left to the end of the quarter, it can take days, and the missing paperwork is harder to find.

5. Understand tax points

The tax point, or time of supply, decides which VAT return a sale or purchase belongs in. Getting it wrong is a common reason for returns that do not add up.

• For goods, the basic tax point is usually when the goods are sent or collected.
• For services, it is usually when the service is completed.
• If you issue a VAT invoice or receive payment before that date, the earlier date becomes the tax point.
• If you issue an invoice within 14 days after the basic tax point, the invoice date usually becomes the tax point.

Under the cash accounting scheme, the tax point is simply the date you are paid or you pay, which is one reason many small businesses find it gives them easy VAT returns.

6. Claim the VAT you are entitled to, and no more

Overclaiming and underclaiming both cause problems. A few rules to keep in mind:

• Business entertainment: VAT on entertaining clients and customers usually cannot be reclaimed. Staff entertainment can be.
• Cars: VAT on buying a car is rarely reclaimable unless the car is used only for business. VAT on vans and on business repairs usually is.
• Fuel: if you reclaim VAT on fuel that is also used privately, you may need to account for the fuel scale charge.
• Mixed use: where a purchase is partly personal, only the business share of the VAT can be claimed.
• No VAT shown: purchases from suppliers who are not VAT-registered have no VAT to reclaim.

7. Use the right VAT rate on every sale

Most sales are standard rated at 20%, but some are reduced rated at 5%, zero rated or exempt. Setting the right rate on each product or service in your software once saves you from correcting invoices every quarter. If you sell a mix of items at different rates, check the rate each time a new product is added.

8. Set aside the VAT as you go

The VAT you charge customers is not your money. Moving it into a separate savings account when you are paid means the bill is already covered when the return is due. Many businesses move a fixed percentage of every receipt, then adjust at the quarter end. It removes the temptation to delay filing because the cash is not there.

9. Run a pre-filing check

Before submitting, spend ten minutes on these checks. They catch most errors and are the final step to easy VAT returns:

1. Compare with last quarter. A big jump or drop in sales, purchases or VAT should have a reason you can explain.
2. Look for duplicates. The same purchase entered twice doubles the VAT reclaimed.
3. Check large items. Every purchase over a few hundred pounds should have a valid VAT invoice attached.
4. Check the period. Make sure nothing from the next quarter has slipped in, and nothing from this one is missing.
5. Review imports and overseas sales. These often need special treatment, such as postponed import VAT or the reverse charge.

10. Correct errors the right way

Mistakes happen. If you find an error in a past return, you can usually correct it on your next return if the net value is below the threshold: £10,000, or up to 1% of the turnover in box 6 for that return (capped at £50,000). Larger or deliberate errors must be reported to HMRC separately. Keep a note of what was corrected and why.

A simple monthly routine

Put the habits above together and easy VAT returns come down to one short session a month and one at the quarter end.

Every month (about 30 minutes)

• Check the bank feed is connected and up to date.
• Match every transaction to an invoice or receipt, and chase anything missing.
• Make sure every sales invoice for the month has been raised, with the right VAT rate.
• Move the VAT you collected into your VAT savings account.

At the quarter end (about 20 minutes)

• Run the VAT report in your software for the period.
• Work through the pre-filing checks in step 9.
• Submit the return and make or confirm the payment.
• Save a copy of the return and the report behind it.

Records must be kept for at least six years, so store them where you can find them again.

Imports, exports and the reverse charge

Trading across borders is where otherwise tidy returns most often go wrong. A few points to know:

• Postponed import VAT accounting lets you account for import VAT on your return instead of paying it at the border. You download a monthly statement from HMRC and use its figures on the return.
• Exports of goods are usually zero rated, but you must keep evidence that the goods left the UK.
• Services bought from overseas suppliers often fall under the reverse charge, where you account for the VAT yourself as both supplier and customer.
• Construction services between VAT-registered businesses in the Construction Industry Scheme often use the domestic reverse charge.

If any of these apply to you, set them up correctly in your software once rather than fixing them every quarter.

Choosing a scheme for easy VAT returns

Some VAT schemes reduce the work involved:

• Cash accounting matches VAT to the money actually moving, so you never pay VAT on invoices your customers have not paid.
• Annual accounting means one return a year, with interim payments.
• Flat Rate Scheme means paying a fixed percentage of turnover, with no need to track VAT on most purchases. It can cost more than standard accounting for businesses with low costs, so check the sums first.

Keep an eye on your deadlines

Even the tidiest records do not help if the return is late. Returns and payments are due one calendar month and seven days after each period ends, and late returns earn penalty points. Our guide to VAT return deadlines and penalties explains the rules.

HMRC's own guidance on what records to keep is in VAT Notice 700/22: Making Tax Digital for VAT on GOV.UK.

Easy VAT returns, done for you

If you would rather not think about VAT at all, our team can take your records each quarter, check every figure, and file the return through Making Tax Digital before the deadline. See our VAT return service for monthly and one-off options.