Submitting a VAT return is one of the core compliance duties for VAT-registered UK businesses. Yet for many business owners, the process remains unclear especially with newer Making Tax Digital (MTD) rules, stricter HMRC penalties, and the complexities of VAT codes, adjustments, and cross-border rules.
This deep-dive guide explains exactly how VAT returns work, how to submit them correctly, what HMRC checks behind the scenes, and the most common mistakes that lead to penalties and VAT inspections.
Whether you’re a sole trader, limited company, freelancer, or growing SME, this guide will help you understand VAT returns with clarity and confidence.
1. What a VAT Return Actually Does
A VAT return is more than a form it’s a digital calculation of how VAT moved through your business during the period.
You report:
- Output VAT – VAT you charged customers
- Input VAT – VAT you paid on allowable business purchases
- The difference – money owed to HMRC (or refunded to you)
You’re essentially collecting VAT on behalf of the government, reclaiming VAT you’ve already paid, and passing on the difference.
VAT returns are legally binding declarations. Any inaccuracies must be corrected as soon as they are identified even if the mistake results in HMRC being owed less or the business being owed a refund.
2. Who Must Submit VAT Returns?
You must submit a VAT return if:
- You’re VAT-registered (compulsory or voluntary)
- You exceed the £90,000 VAT threshold (from 1 April 2024)
- You have no sales in the period a “nil VAT return” is still mandatory
- You are registered under any special VAT schemes
Late submission (even for a nil or repayment return) triggers HMRC’s penalty-point system. Once you reach a certain number of points, you’ll face a £200 fixed penalty.
3. VAT Return Deadlines
Most businesses file quarterly.
Deadline:
1 month + 7 days after the end of the VAT period
For example: Period ends: 30 June VAT return due: 7 August
If you pay via Direct Debit, HMRC will collect the payment automatically but note: the collection happens 3 working days after your VAT return deadline, so make sure your Direct Debit is set up at least 3 working days before you submit your return. Even though the payment is delayed by a few days, the deadline for filing your return remains the same.
4. Making Tax Digital (MTD): What You Must Know
MTD is now mandatory for all VAT-registered businesses.
You must:
Use MTD-compatible software
Examples:
- Xero
- QuickBooks
- Sage
- Zoho Books
- FreeAgent
Keep digital VAT records
Including:
- Sales invoices
- Purchase invoices
- VAT codes
- Adjustments
- Imports & exports
Submit digitally
You can no longer manually type figures into the old HMRC portal.
This system reduces human error but it also means your software accuracy matters more than ever.
5. What You Need Before Filing Your VAT Return
You must have:
A) Accurate digital records
HMRC requires digital copies of:
- Invoices
- Receipts
- VAT calculations
- Adjustment records
B) Reconciled bookkeeping
Your bank, sales, and expenses must match.
If they don’t, your VAT return will be wrong.
C) Correct VAT codes
Most mistakes arise from wrong codes:
- 20% standard
- 5% reduced
- 0% zero-rated
- Exempt
- Outside the scope
- Reverse charge (especially for construction or digital services)
6. Step-by-Step: How to Submit a VAT Return Through MTD Software
Step 1: Log in to your accounting software
Your VAT periods automatically sync with HMRC through your MTD connection.
Step 2: Review every transaction
This is the stage with the highest risk of mistakes.
Review:
- Sales coded correctly?
- Is VAT claimed only on allowable expenses?
- Any missing receipts?
- Any duplicated or uncategorised transactions?
- Imports and reverse charge correctly handled?
Your software calculates VAT based entirely on VAT codes so accuracy starts here.
Step 3: Reconcile the bank
Reconciling the bank ensures:
- No missing or duplicate income
- No unrecorded supplier payments
- Card settlement fees are recorded
- Cash transaction entries match
Bank reconciliation is the foundation of an accurate VAT return.
Step 4: Open and review the VAT Summary (Boxes 1–9)
Every UK VAT return contains nine boxes:
Box 1 – VAT due on sales and other outputs
This is the total VAT you charged on all goods and services you sold during the period. It also includes VAT due on reverse-charge purchases.
Box 2 — VAT due on goods imported from the EU
Used only if you import goods from EU countries.
Most UK businesses now leave this at £0, unless they still trade in goods under special arrangements.
Box 3 — Total VAT due (Box 1 + Box 2)
HMRC uses this to calculate all VAT you owe before reclaiming anything.
Box 4 — VAT reclaimed on purchases and expenses
This is the VAT you can reclaim on business expenses based on valid VAT invoices.
Box 5 — Net VAT to pay or reclaim
This is Box 3 minus Box 4.
If the figure is positive you owe HMRC.
If negative HMRC owes you a repayment.
Box 6 — Total value of sales (excluding VAT)
This is your total net sales figure (VAT not included).
Box 7 — Total value of purchases (excluding VAT)
This includes all purchases and expenses, excluding VAT, even if no VAT can be reclaimed.
Box 8 — Value of goods exported to the EU
Only required if your business supplies goods to EU countries.
Services do not go here.
Box 9 — Value of goods imported from the EU
Only used if you buy goods from the EU and bring them into the UK.
Step 5: Apply necessary adjustments
Common adjustments:
- Bad debt relief: Allowed after 6 months unpaid.
- Partial exemption calculations: For businesses with both taxable and exempt sales.
- Reverse charge: Construction, overseas digital services, certain telecom services, etc.
- Fuel scale charges: For vehicles with mixed business/personal use.
- Post-registration claims: VAT reclaimable on pre-registration purchases (within time limits).
- Error corrections: HMRC rules allow Errors under £10,000 – adjust in next return
- Larger errors or deliberate errors: report via VAT652
(HMRC guidance: errors must ALSO be under 1% of Box 6 turnover to adjust next return.)
Step 6: Submit the VAT return to HMRC
Once reviewed, submit directly through the software.
You will receive:
- A digital submission receipt
- A unique HMRC submission ID
- Confirmation for audit records
Keep these for 6 years.
Step 7: Make the VAT payment (if owed)
Payment options:
- Direct Debit (most common)
- Faster Payments / bank transfer
- Corporate debit card
If you’re due a refund, HMRC typically processes it within 5–10 working days, although times can vary.
7. The Most Common VAT Return Mistakes (and Why They Matter)
Businesses frequently run into issues due to:
- Misused VAT codes (0% vs exempt vs outside scope)
- Claiming VAT on non-allowable expenses (entertainment, personal costs)
- Incorrect treatment of imports/exports
- Missing reverse charge entries
- Not reconciling accounts
- Missing VAT on employee expenses
- Not considering partial exemption
- Forgetting to claim legitimate VAT on assets
8. VAT Late Submission & Late Payment Penalties (Updated for HMRC Rules)
HMRC now uses a points-based system for late VAT returns.
- You get 1 penalty point for every late submission even nil or repayment returns.
- When you reach your threshold (Quarterly: 4 points • Annual: 2 • Monthly: 5) HMRC charges a £200 penalty.
- After that, every additional late return triggers another £200 penalty.
- Late-payment interest applies separately on overdue VAT.
- HMRC can apply stricter penalties if they believe the behaviour is deliberate (under separate rules).
9. VAT Schemes That Change Your VAT Return
Flat Rate Scheme
- You charge 20% VAT
- You pay HMRC a fixed percentage
- You cannot reclaim most purchase VAT
Useful for service businesses with low expenses.
Cash Accounting Scheme
You pay VAT only when customers pay you. Helps with cashflow.
Annual Accounting Scheme
One VAT return per year but advance payments required.
Retail schemes
Used for high-volume, low-value transactions.
Final Thoughts
Submitting a VAT return isn’t just data entry it’s making sure your bookkeeping, reconciliations, and digital records all match HMRC requirements. With the new penalty-points system, even one late submission can trigger points, penalties, or interest. That’s why accuracy, consistency, and timely filing matter more than ever.
If all of this feels overwhelming, Pro Taxman can handle the entire process for you from clean bookkeeping and MTD-compliant digital records to reviewing errors and submitting your VAT return on time.