Value added tax - Recordkeeping and compliance

Learning Outcomes

This article explains the legal framework and practical rules governing VAT recordkeeping and compliance for SQE1 candidates, focusing on how the UK VAT system operates in day-to-day practice. It explains when VAT registration is compulsory, how voluntary registration and deregistration work, and the special registration rules for non-established taxable persons and VAT groups. It sets out the statutory recordkeeping and retention obligations, the content of a compliant VAT invoice, and how to maintain a VAT account that reconciles to submitted returns. It explains the core requirements of Making Tax Digital, including digital recordkeeping, digital links, use of compatible software, and the limited circumstances in which exemptions may apply. It covers VAT return frequencies, filing and payment deadlines, and the interaction with annual accounting, cash accounting, and postponed import VAT accounting (PVA). It examines the VAT treatment and evidence requirements for imports, exports, and cross-border services, including the reverse charge. It analyzes the main penalty regimes for late registration, late filing, late payment, and inaccuracies, along with HMRC’s information and inspection powers, time to pay arrangements, and how the late submission points system and late payment penalties are calculated and mitigated in exam-style scenarios.

SQE1 Syllabus

For SQE1, you are required to understand VAT recordkeeping and compliance from a practical standpoint, with a focus on the following syllabus points:

• 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
• postponed import VAT accounting (PVA) and evidence requirements
• how the late submission points regime operates and resets

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.

1. When must a business register for VAT in the UK, and what is the current registration threshold?
2. What records must a VAT-registered business keep, and for how long?
3. What is Making Tax Digital (MTD) for VAT, and which businesses does it apply to?
4. 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, enforcement, and special rules for international trade and VAT groups.

Key Term: taxable turnover
The total value of sales subject to VAT (standard, reduced, and zero-rated), excluding VAT itself, in a 12-month period. Exempt supplies are excluded.

Key Term: taxable person
Any individual, partnership, company, LLP or other entity required to register for VAT and account for VAT on taxable supplies.

VAT Registration: When and How

A business must register for VAT if its taxable turnover exceeds the registration threshold (currently £90,000) in any rolling 12-month period, or if it expects to exceed this threshold in the next 30 days alone. Overseas businesses with no UK establishment (non-established taxable persons) must register from the first taxable UK supply—no threshold applies. Voluntary registration is also possible below the threshold, which allows input tax recovery but brings full compliance obligations.

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. The effective date is the day after the end of the month in which the threshold is exceeded (unless the forward-look rule applies, in which case it is the date the business knew it would exceed the threshold in the next 30 days).

Deregistration is available where taxable turnover falls below the deregistration threshold or the business ceases to make taxable supplies. On deregistration, output tax may be due on certain assets and stock on hand if their value (excluding VAT) exceeds the statutory amount.

Key Term: VAT group
A group registration allowing two or more eligible bodies under common control to be treated as a single taxable person. One group member acts as representative; all members are jointly and severally liable.

Worked Example 1.1

A sole trader’s turnover for the last 12 months is £92,000. 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 effective date of registration.

Worked Example 1.2

A company expects to sign a new contract next week that will generate £100,000 of taxable turnover within 30 days. What is the registration position?

Answer:
The forward-look rule applies. The company must notify HMRC immediately and will be liable to register from the date it knew the threshold would be exceeded within 30 days. VAT must be charged on taxable supplies from that effective date.

Recordkeeping Requirements

VAT-registered businesses must keep specific records for at least six years (or longer if required by other regulations or for open assessments). These include:

• sales and purchase invoices (including simplified VAT invoices for amounts under the statutory limit)
• a VAT account (summary of output and input VAT for each VAT period)
• credit and debit notes
• import and export documentation and evidence supporting zero-rating
• partial exemption calculations and annual adjustments (if applicable)
• VAT returns and the workings supporting each box value
• retail scheme records (if a special retail scheme is used)
• C79 certificates or monthly online statements and customs documents for import VAT, or monthly PVA statements if using postponed import VAT accounting

Records may be kept electronically or on paper. They must be accurate, complete, and available for inspection by HMRC. Businesses must also record the tax point (time of supply), VAT rate applied, and any adjustments (bad debt relief claims, reverse charge entries, and corrections to previous periods).

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, reconciling to the VAT return.

Correct VAT invoicing is part of recordkeeping. Full VAT invoices must contain prescribed information (supplier details, VAT number, date, invoice number, customer details, description, quantity, net amount, VAT rate, VAT amount). Simplified invoices may be used for lower-value supplies, subject to the statutory limits.

Digital Compliance: Making Tax Digital (MTD)

All VAT-registered businesses must comply with Making Tax Digital (MTD). This means:

• keeping specified VAT records digitally using compatible software (or spreadsheets linked by “digital links” to MTD software)
• submitting VAT returns to HMRC via MTD-compatible software (not by manual entry on HMRC’s old portal)

MTD requires “digital links” between systems—data must flow electronically between records and the VAT return without manual rekeying or copy-and-paste (subject to limited transitional rules that have now ended). Bridging software may be used with spreadsheets, provided digital links are in place. Exemptions apply only in very limited circumstances (e.g. where it is not reasonably practicable to use digital tools for reasons of age, disability, remoteness of location, or religion).

Key Term: Making Tax Digital (MTD)
A legal requirement for VAT-registered businesses to keep digital VAT records and file VAT returns using compatible software, maintaining digital links between records and the VAT return.

MTD obligations include maintaining digital records of the supplies made and received (date, value, VAT rate), adjustments (e.g. partial exemption), and the digital journey from transactional records to the VAT return.

Worked Example 1.3

A business keeps sales and purchase ledgers in spreadsheets and manually copies totals into the MTD software to file returns. Is this compliant?

Answer:
No. Under MTD the transfer of data must be via digital links. Copy-and-paste/manual entry breaks the digital link requirement. The business must implement a digital connection (e.g. bridging software that pulls data directly from the spreadsheets) or move to compatible accounting software.

VAT Returns and Payment Deadlines

VAT returns are usually submitted quarterly, but some businesses may file monthly or annually. The return captures aggregated totals (e.g. output tax due, input tax recoverable, net VAT payable or reclaimable). Businesses using postponed import VAT accounting report import VAT in the appropriate boxes and offset it in the same return.

Returns and payments are due one calendar month and seven days after the end of the VAT period. Payment by direct debit may allow a few extra days for collection. Late filing or payment engages penalties and interest.

Annual accounting and cash accounting schemes, where eligible and opted into, change timing of reporting and/or recovery of input tax but do not alter core recordkeeping or MTD obligations. Large payers may be required to make payments on account.

Key Term: postponed VAT accounting (PVA)
A regime allowing import VAT to be accounted for on the VAT return instead of paying at the border. Monthly PVA statements must be retained as evidence.

Worked Example 1.4

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. If paying by direct debit, HMRC will collect shortly after the due date.

International Transactions and VAT Groups

VAT rules differ for international transactions:

• Supplies of goods exported outside the UK are usually zero-rated, but businesses must keep robust evidence of export (e.g. commercial transport documents, bills of lading). Failure to evidence export within prescribed time limits may lead to VAT being due.
• Imports of goods into the UK are subject to import VAT. Businesses may use postponed VAT accounting (PVA) to declare and recover import VAT on the VAT return; monthly PVA statements are required for records.
• For cross-border services, the place of supply rules govern whether UK VAT is due. For B2B services, the reverse charge commonly applies, where the customer accounts for VAT in their jurisdiction. For specified UK domestic sectors (e.g. construction), a domestic reverse charge may apply.

Key Term: reverse charge
A mechanism where the customer, not the supplier, accounts for VAT on certain supplies. Applies to many cross-border B2B services and some designated domestic sectors.

VAT grouping allows related companies to be treated as a single taxable person for VAT purposes. Intra-group supplies are disregarded for VAT (with exceptions), but the representative member is responsible for submitting group returns, and all group members are jointly and severally liable for VAT debts. Group membership affects partial exemption and capital goods scheme calculations; records must allow HMRC to trace intra-group transactions and adjustments.

Worked Example 1.5

A UK business imports goods from outside the UK and uses PVA. How is the VAT recorded and evidenced?

Answer:
The import VAT is declared on the VAT return (output tax) and, subject to normal rules, recovered as input tax in the same return, creating a nil cash flow effect. The business must retain monthly PVA statements and relevant customs documents as evidence.

Penalties and HMRC Enforcement

HMRC can impose penalties for:

• late registration or failure to notify changes (including failure to register as an overseas supplier where no threshold applies)
• late filing or payment (under the late submission points and late payment penalty regime)
• errors on VAT returns (inaccuracy penalties)
• failure to keep proper records or comply with MTD

HMRC may carry out audits and inspections. Schedule 36 FA 2008 gives HMRC information and inspection powers, subject to safeguards. Voluntary disclosure of errors can reduce penalties; a “reasonable excuse” defence may apply to some defaults.

Key Term: default surcharge
Historically, a penalty for late VAT returns or payments. For VAT periods starting on or after 1 January 2023, it has been replaced by the late submission points regime and late payment penalties.

Key Term: late submission points
A regime where each late or missed VAT return earns a point. Reaching the threshold (monthly: 5; quarterly: 4; annually: 2) triggers a £200 penalty, with £200 for each subsequent late submission until points are reset after a compliance period.

Key Term: time to pay (TTP)
An agreement with HMRC to pay tax over time. Entering a TTP promptly can mitigate late payment penalties (especially within the first 15–30 days) and reduce interest accrual.

Late submission points accrue for missed returns; the points threshold depends on filing frequency. After reaching the threshold, a fixed penalty is charged; points can be reset after a period of compliance and submission of outstanding returns. Late payment penalties comprise an initial penalty (up to 4% based on amounts outstanding at days 15 and 30) and an ongoing daily penalty from day 31 (calculated at an annualized rate). Late payment interest accrues from the day after the due date until payment, at HMRC’s published rates.

Inaccuracy penalties depend on behaviour and disclosure (careless, deliberate, deliberate and concealed; prompted or unprompted). Penalties can be suspended in some cases if the business agrees and implements effective compliance improvements.

Worked Example 1.6

A business files its VAT return 10 days late and pays VAT late. What may happen?

Answer:
Under the current regime, a late submission point is incurred for the late return. If the points threshold is reached, a fixed £200 penalty applies. For late payment, an initial penalty may be charged after day 15 and day 30 (up to 4%), with daily penalties from day 31. Late payment interest also accrues. Promptly agreeing a time to pay can reduce penalties.

Key Point Checklist

This article has covered the following key knowledge points:

• VAT registration is required when taxable turnover exceeds the current threshold (rolling 12 months or forward-look 30 days). Overseas suppliers may have no threshold.
• VAT-registered businesses must keep specified records for at least six years, including evidence to support zero-rated exports and PVA statements for imports.
• Making Tax Digital requires digital recordkeeping, digital links, and digital VAT return submission via compatible software for all VAT-registered businesses.
• VAT returns and payments are due one month and seven days after the VAT period ends; direct debit collection follows shortly after.
• International rules include zero-rating for exports (with evidence), import VAT (including PVA), and reverse charge mechanisms for certain services.
• VAT grouping treats related companies as a single taxable person; intra-group supplies are disregarded but members are jointly and severally liable.
• The late submission points regime and late payment penalties apply for late returns and payments; inaccuracy penalties apply to errors. Time to pay can mitigate penalties.
• HMRC can audit businesses, require records to be produced, and apply information powers. Voluntary disclosures can reduce penalties.

Key Terms and Concepts

• taxable turnover
• taxable person
• VAT account
• Making Tax Digital (MTD)
• reverse charge
• default surcharge
• VAT group
• postponed VAT accounting (PVA)
• late submission points
• time to pay (TTP)