Learning Outcomes
After reading this article, you will be able to explain the legal requirements for VAT registration, identify the core recordkeeping and digital compliance obligations for VAT-registered businesses, and outline the main penalties for non-compliance. You will also be able to apply these principles to SQE1-style scenarios and advise on practical steps to ensure VAT compliance.
SQE1 Syllabus
For SQE1, you are required to understand VAT recordkeeping and compliance from a practical standpoint. Focus your revision on:
- the legal requirements for VAT registration and deregistration
- the statutory obligations for VAT recordkeeping and retention
- the rules for digital VAT compliance (Making Tax Digital)
- the process and deadlines for submitting VAT returns and payments
- the main penalties for VAT non-compliance and HMRC enforcement powers
- how VAT rules apply to international transactions and VAT groups
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- When must a business register for VAT in the UK, and what is the current registration threshold?
- What records must a VAT-registered business keep, and for how long?
- What is Making Tax Digital (MTD) for VAT, and which businesses does it apply to?
- What are the consequences of failing to file a VAT return or pay VAT on time?
Introduction
Value Added Tax (VAT) is a tax on the supply of goods and services in the UK. VAT compliance is a key area for solicitors advising business clients. The law requires VAT-registered businesses to keep accurate records, submit returns, and pay VAT due to HMRC. Failure to comply can result in significant penalties. This article explains the essential rules for VAT recordkeeping and compliance, including digital requirements, deadlines, and enforcement.
VAT Registration: When and How
A business must register for VAT if its taxable turnover exceeds the registration threshold (currently £85,000) in any rolling 12-month period, or if it expects to exceed this threshold in the next 30 days alone. Voluntary registration is also possible below this threshold.
Key Term: taxable turnover
The total value of sales subject to VAT, excluding VAT itself, in a 12-month period.Key Term: taxable person
Any individual, partnership, company, or other entity required to register for VAT and account for VAT on taxable supplies.
Registration is done online with HMRC. Once registered, the business must charge VAT on taxable supplies, issue VAT invoices, and comply with all VAT obligations from the effective date of registration.
Worked Example 1.1
A sole trader’s turnover for the last 12 months is £86,000. What must they do?
Answer: The trader must register for VAT with HMRC within 30 days of exceeding the threshold. VAT must be charged on all taxable sales from the date of registration.
Recordkeeping Requirements
VAT-registered businesses must keep specific records for at least six years. These include:
- sales and purchase invoices
- VAT account (summary of output and input VAT)
- credit and debit notes
- import and export documentation (if applicable)
- VAT returns and calculations
Records may be kept electronically or on paper, but must be accurate, complete, and available for inspection by HMRC.
Key Term: VAT account
A summary record showing total output tax (VAT charged on sales) and input tax (VAT paid on purchases) for each VAT period.
Digital Compliance: Making Tax Digital (MTD)
Most VAT-registered businesses with taxable turnover above the threshold must comply with Making Tax Digital (MTD). This means:
- keeping VAT records digitally using compatible software
- submitting VAT returns to HMRC via approved software
Spreadsheets may be used if linked to MTD-compatible software. MTD aims to reduce errors and improve efficiency.
Key Term: Making Tax Digital (MTD)
A legal requirement for most VAT-registered businesses to keep digital VAT records and file VAT returns using compatible software.
VAT Returns and Payment Deadlines
VAT returns are usually submitted quarterly, but some businesses may file monthly or annually. The return must show:
- total sales and purchases
- output VAT due
- input VAT reclaimable
- net VAT payable or reclaimable
Returns and payments are due one calendar month and seven days after the end of the VAT period. Late filing or payment can result in surcharges and penalties.
Worked Example 1.2
A company’s VAT quarter ends on 31 March. By what date must it file its VAT return and pay any VAT due?
Answer: The company must file its VAT return and pay any VAT due by 7 May.
International Transactions and VAT Groups
VAT rules differ for international transactions:
- Exports of goods outside the UK are usually zero-rated, but evidence of export must be kept.
- Imports may require accounting for import VAT.
- The reverse charge may apply to certain services received from abroad.
Key Term: reverse charge
A mechanism where the customer, not the supplier, accounts for VAT on certain cross-border supplies.
VAT grouping allows related companies to be treated as a single taxable person for VAT purposes. Intra-group supplies are disregarded for VAT, but all group members are jointly liable for VAT debts.
Penalties and HMRC Enforcement
HMRC can impose penalties for:
- late registration
- late filing or payment
- errors on VAT returns
- failure to keep proper records
Penalties are calculated based on the type and seriousness of the failure. HMRC may also carry out audits and inspections. Voluntary disclosure of errors can reduce penalties.
Key Term: default surcharge
A penalty for late VAT returns or payments, increasing with repeated defaults.
Worked Example 1.3
A business files its VAT return 10 days late and pays VAT late. What may happen?
Answer: HMRC may impose a default surcharge, starting at 2% of the unpaid VAT, and increasing with further defaults.
Key Point Checklist
This article has covered the following key knowledge points:
- VAT registration is required when taxable turnover exceeds the threshold.
- VAT-registered businesses must keep specified records for at least six years.
- Making Tax Digital requires digital recordkeeping and digital VAT return submission.
- VAT returns and payments are due one month and seven days after the VAT period ends.
- Penalties apply for late registration, late returns, late payment, and errors.
- HMRC can audit businesses and require records to be produced.
- International transactions and VAT groups have special VAT rules.
Key Terms and Concepts
- taxable turnover
- taxable person
- VAT account
- Making Tax Digital (MTD)
- reverse charge
- default surcharge
