Value added tax - Returns and payment of VAT

Learning Outcomes

This article explains the process for submitting Value Added Tax (VAT) returns and making payments to HM Revenue & Customs (HMRC). After studying this material, you will understand the standard procedures, including the usual frequency of returns, associated deadlines, the implications of Making Tax Digital (MTD), necessary record-keeping practices, and the types of penalties HMRC imposes for non-compliance. This knowledge will equip you to tackle SQE1 questions relating to VAT administration for businesses.

SQE1 Syllabus

For SQE1, you are required to understand the key elements of VAT administration from a practical standpoint. This article covers aspects relevant to the assessment, focusing on the processes and requirements for businesses registered for VAT.

As you work through this article, remember to pay particular attention in your revision to:

• the procedures for submitting VAT returns and remitting payments to HMRC
• the standard deadlines that apply to VAT returns and payments
• the specific requirements mandated by Making Tax Digital (MTD) for VAT-registered entities
• the obligations concerning the types of VAT records that must be maintained and their retention periods
• the categories of penalties that can be levied for non-compliance regarding VAT submissions and payments.

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. For a business filing quarterly VAT returns electronically, what is the deadline for both submitting the return and ensuring payment clears into HMRC's account?
   1. The last day of the month following the end of the accounting period.
   2. 7 days after the end of the accounting period.
   3. 1 month and 7 days after the end of the accounting period.
   4. 1 month after the end of the accounting period.
2. Which method are most VAT-registered businesses required to use for submitting their VAT returns under Making Tax Digital (MTD)?
   1. Paper forms sent by registered post.
   2. Manual data entry via the standard HMRC online portal.
   3. MTD-compatible software linked to HMRC's systems.
   4. Telephone submission service.
3. What is the standard minimum period for which VAT records must generally be kept by a registered business?
   1. 3 years after the transaction date.
   2. 5 years from the end of the accounting period.
   3. 6 years from the end of the relevant accounting period.
   4. 7 years for all business records.

Introduction

Businesses in the UK that are registered for Value Added Tax (VAT) have a statutory obligation to report their VAT activities to HM Revenue & Customs (HMRC) at regular intervals. This reporting is achieved through the submission of a VAT return. Alongside the return, any net VAT owed for the period must be paid to HMRC by the specified deadline. Adherence to the rules governing VAT returns and payments, including the relatively recent Making Tax Digital requirements, is essential for businesses to avoid penalties and interest charges. This article outlines the essential procedures and obligations.

THE VAT RETURN: SUBMISSION AND CONTENT

A business registered for VAT must periodically inform HMRC about the VAT it has charged on its sales and the VAT it has paid on its purchases. This formal declaration is known as the VAT return.

Key Term: VAT Return
A periodic declaration submitted to HMRC detailing a business's total output tax charged and input tax incurred during a specific accounting period, calculating the net VAT payable or repayable.

The core calculation within the VAT return involves determining the difference between the total output tax collected and the total input tax paid during the reporting timeframe.

Key Term: Output Tax
The VAT a registered business adds to the price of its taxable goods and services when selling them to customers.

Key Term: Input Tax
The VAT paid by a registered business when purchasing goods or services for use in its business activities. This VAT can often be reclaimed from HMRC.

If output tax exceeds input tax, the difference is payable to HMRC. If input tax exceeds output tax, the business is usually entitled to a repayment from HMRC.

The frequency of VAT returns is typically quarterly. HMRC assigns these three-month accounting periods to businesses upon registration. While quarterly is standard, monthly returns are mandatory for businesses in a regular repayment position, and annual returns are available under specific schemes, though less common.

Key Term: Accounting Period (VAT)
The designated timeframe, usually three months, that a single VAT return covers for a business, as determined by HMRC.

DEADLINES AND PAYMENT REQUIREMENTS

Strict deadlines apply to both the submission of the VAT return and the payment of any VAT due.

For most businesses filing electronically on a quarterly basis, the deadline is 1 month and 7 calendar days following the end of the relevant accounting period. This deadline applies equally to submitting the return data and ensuring that the payment has cleared into HMRC's bank account.

Worked Example 1.1

A business uses quarterly VAT accounting periods ending on 31 March, 30 June, 30 September, and 31 December. For the period ending 30 September, what is the deadline for electronic return submission and payment clearance?

Answer: The deadline is 1 month and 7 days after 30 September. This falls on 7 November. The VAT return must be submitted, and the payment must be received as cleared funds by HMRC, no later than this date.

It is critical for businesses to initiate payment sufficiently in advance to ensure funds clear by the deadline. Popular payment methods include:

• Direct Debit (HMRC usually collects payment 3 working days after the deadline, but the Direct Debit must be set up beforehand).
• Online banking (Faster Payments typically clear same day, Bacs takes 3 working days, CHAPS is same day if instructed before the bank's cut-off).
• Debit/Corporate Credit Card online.

Failure to meet the payment deadline, even if the return is submitted on time, will lead to penalties and interest charges.

MAKING TAX DIGITAL FOR VAT

A significant change in recent years is the introduction of Making Tax Digital (MTD) for VAT. Compliance is now mandatory for virtually all VAT-registered businesses, irrespective of their turnover.

Key Term: Making Tax Digital (MTD)
An HMRC requirement for most VAT-registered businesses to keep digital VAT records and submit VAT returns using compatible software that links directly to HMRC's systems.

Under MTD, businesses are required to:

1. Keep specified VAT records digitally. This typically involves using accounting software or potentially spreadsheets configured with bridging software.
2. File VAT returns using MTD-compatible software. Manual input through the standard HMRC online VAT portal is generally no longer permitted for businesses mandated to use MTD.

Revision Tip

For SQE1 purposes, assume that businesses described in scenarios are required to comply with MTD unless explicitly stated otherwise. Focus on the need for digital records and software-based submission.

VAT RECORD-KEEPING OBLIGATIONS

VAT-registered businesses must maintain detailed and accurate records to support the figures declared on their VAT returns. This is a legal requirement.

Key Term: VAT Record Keeping
The statutory obligation for VAT-registered businesses to maintain specific business and VAT-related documents and data accurately and retain them for a defined period.

Essential records include:

• Copies of all sales invoices issued and purchase invoices received.
• Specific VAT invoices for standard-rated or reduced-rated supplies received, which are necessary to reclaim input tax.
• A VAT account, which acts as a summary record linking the primary business records to the figures submitted on the VAT return. It shows the totals of output tax and input tax for the period.
• Evidence of any goods exported or imported.
• Records of adjustments, such as correcting errors or accounting for specific VAT schemes.
• Any credit notes or debit notes issued or received.

MTD mandates that certain core data from these records must be held digitally. The standard retention period for VAT records is a minimum of six years from the end of the relevant accounting period.

Key Term: VAT Invoice
A specific document required for VAT-registered transactions (excluding zero-rated or exempt supplies) that must contain certain details, including the supplier’s VAT registration number, the date of supply (tax point), a unique invoice number, customer details, a clear description of the goods or services, the quantity, the price per item (excluding VAT), any discount rate, the rate of VAT applied to each item, the total amount excluding VAT, and the total amount of VAT charged.

PENALTIES FOR NON-COMPLIANCE

HMRC enforces compliance through various penalty regimes. For VAT periods starting on or after 1 January 2023, new penalty systems for late submission and late payment apply.

• Late Submission: HMRC operates a points-based system. A business incurs a penalty point for each late VAT return. Once a business reaches a specific points threshold (which depends on their reporting frequency - e.g., 4 points for quarterly returns), a £200 financial penalty is issued. Further late submissions while at the threshold also attract a £200 penalty. Points expire after a set period of compliant submissions.
• Late Payment: Penalties are calculated based on how late the payment is made.
  • Days 1-15: No penalty, but interest applies from the due date.
  • Days 16-30: First penalty of 2% of the VAT outstanding at day 15.
  • Day 31 onwards: First penalty increases to 4% (2% at day 15 + 2% at day 30). A second penalty at a daily rate (annualised at 4%) applies from day 31 on VAT still outstanding.
• Inaccuracies: Penalties are levied if a VAT return contains an inaccuracy that leads to an understatement of tax liability (or overstatement of a repayment claim) and the error arose due to behaviour ranging from lack of reasonable care to deliberate and concealed actions. The penalty is a percentage of the potential lost revenue, varying based on the behaviour type and whether the disclosure of the error was prompted by HMRC or unprompted by the business.

Interest is charged on all VAT paid late, accruing daily from the original due date until full payment is received by HMRC.

Worked Example 1.2

A business submits its quarterly VAT return on time but pays the £10,000 VAT due 40 days late. Outline the potential late payment penalties under the regime for periods starting on/after 1 Jan 2023.

Answer: Payment is more than 30 days late.

• A first penalty of 4% applies (2% calculated based on the amount outstanding at day 15, plus a further 2% based on the amount outstanding at day 30). Assuming the full £10,000 was outstanding at both points, this is 4% of £10,000 = £400.
• A second penalty applies from day 31 until the payment date (day 40). This is calculated daily at an annualised rate of 4% on the outstanding amount.
• Interest is also charged from the original due date until payment is made.

Exam Warning

You are expected to know the types of non-compliance that attract penalties (late submission, late payment, inaccuracies) and the basis on which they are calculated (points, time-delay percentage, behaviour percentage). You are unlikely to need to calculate precise penalty amounts or recall specific thresholds for SQE1, but understanding the different regimes is key.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• VAT returns summarise a business's output tax collected and input tax incurred, resulting in a net payment to or repayment from HMRC.
• The standard filing and payment deadline for quarterly electronic returns is 1 month and 7 days after the accounting period ends.
• Making Tax Digital (MTD) requires most VAT-registered businesses to maintain digital records and submit returns using compatible software.
• Businesses must keep VAT records, including VAT invoices, for at least six years to support their returns.
• HMRC imposes penalties for late submission (points-based system), late payment (percentage increases with delay), and inaccuracies (behaviour-based).
• Interest is payable on any VAT paid after the due date.

Key Terms and Concepts

• VAT Return
• Output Tax
• Input Tax
• Accounting Period (VAT)
• Making Tax Digital (MTD)
• VAT Record Keeping
• VAT Invoice