Value added tax - Returns and payment of VAT

Learning Outcomes

This article explains VAT return and payment obligations for UK businesses, including:

• the process for completing VAT100 returns, identifying output tax, input tax and net VAT payable or reclaimable for each accounting period.
• the standard filing and payment deadlines for electronic quarterly returns, how stagger groups operate, and how schemes such as annual accounting, cash accounting and payments on account alter timing.
• the requirements of Making Tax Digital (MTD), focusing on digital record-keeping, digital links, and the use of MTD-compatible or bridging software for submitting returns.
• statutory VAT record-keeping obligations, including the content and retention of VAT invoices, VAT accounts, import and export evidence, and scheme-specific records.
• how to correct VAT errors within returns, when separate disclosure to HMRC is required, and the impact of careless, deliberate or concealed behaviour on inaccuracy penalties.
• the late submission points regime, the staged late payment penalties (including the effect of agreeing Time to Pay arrangements), and the continuing role of interest on overdue VAT.
• how these administrative and compliance rules are tested in SQE1 FLK1 scenarios, for example in questions on cash-flow planning, error correction, penalty calculations and enforcement risk.

SQE1 Syllabus

For SQE1, you are required to understand the key elements of VAT administration from a practical standpoint, including the processes and requirements for businesses registered for VAT, with a focus on the following syllabus points:

• 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
• the main return schemes that affect return frequency and payments (annual accounting, payments on account) and how they alter timing and cash flow
• how to correct VAT errors and when to disclose them separately to HMRC.

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.

Key Term: VAT
A tax on the consumption of goods and services, charged on taxable supplies made in the UK by taxable persons in the course of business. Businesses collect VAT on sales (output tax), reclaim VAT on purchases (input tax), and periodically account for the net amount to HMRC.

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 common for businesses that frequently claim repayments (e.g., exporters), and an annual return is available under the Annual Accounting Scheme for eligible smaller businesses.

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

Key Term: VAT Account
A summary record that links primary records to the VAT return. It shows, for each period, the totals for output tax due, adjustments (e.g., credit notes, error corrections), input tax claimed, and the resulting net VAT payable or repayable.

The VAT100 return boxes (what is reported)

Although most businesses now submit returns digitally via MTD-compatible software, the core VAT100 “box” concepts remain central:

• Box 1: VAT due on sales and other outputs (including certain reverse-charge amounts and import VAT accounted for via PVA—see below).
• Box 2: VAT due on acquisitions of goods from the EU. Post‑Brexit, this box generally applies where the Northern Ireland protocol applies to your business (EU acquisitions into NI).
• Box 3: Total VAT due (sum of boxes 1 and 2).
• Box 4: VAT reclaimed on purchases and other inputs (including import VAT accounted for via PVA, if applicable).
• Box 5: Net VAT to pay or reclaim (box 3 minus box 4).
• Box 6: Total value of sales and all other outputs excluding VAT.
• Box 7: Total value of purchases and all other inputs excluding VAT.
• Box 8: Total value of supplies of goods and related costs to EU member states (generally NI businesses only).
• Box 9: Total value of acquisitions of goods and related costs from EU member states (generally NI businesses only).

Key Term: Postponed Import VAT Accounting (PVA)
A method that lets importers account for import VAT on their VAT return (boxes 1 and 4) rather than paying it at the border. Monthly statements from the Customs Declaration Service support the entries and must be retained.

Special VAT schemes can simplify how values are derived for the boxes. For example, under the Flat Rate Scheme a percentage is applied to gross turnover instead of tracking input tax (with limited exceptions), and under cash accounting VAT is accounted for on receipts and payments rather than invoices.

Key Term: Flat Rate Scheme
A scheme for small businesses under which a fixed percentage is applied to gross VAT-inclusive turnover to determine VAT due; input tax is generally not reclaimed (with specific exceptions).

Key Term: Annual Accounting Scheme
A scheme that allows eligible businesses to submit one return per year with periodic advance payments towards the year’s expected VAT and a balancing payment or refund with the annual return.

Key Term: Cash Accounting Scheme
A scheme allowing VAT to be accounted for on the basis of cash received and paid rather than invoice dates, aiding cash flow management for eligible smaller businesses.

These schemes change how data feeds into the return but not the fundamental obligation to file and pay on time.

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 if the return is submitted on time and the mandate is in place; ensure funds are available).
• Faster Payments or CHAPS (same‑day subject to bank cut‑off times).
• Bacs (typically 3 working days).
• Online debit or corporate credit card (subject to HMRC’s accepted card types and surcharges).
• Bank transfer using the correct VAT reference (to avoid misallocation).

If the deadline falls on a weekend or bank holiday, HMRC must still receive cleared funds by the due date; plan payments accordingly.

Stagger groups and non‑standard periods

HMRC allocates quarterly “stagger” groups so businesses’ deadlines are spread across the calendar. On first registration or deregistration, the initial or final VAT period may be a non‑standard length; the due date still follows the one‑month‑and‑seven‑days rule from the period end.

Large payers: Payments on account

Key Term: Payments on Account (POA)
A regime for large VAT payers (net annual VAT liability above a HMRC threshold) requiring monthly interim payments and a balancing payment with the return. It smooths cash flow to HMRC and reduces large quarter‑end receipts.

Businesses in POA make two monthly payments in months 2 and 3 of each quarter and a balancing payment with the return. The standard 1 month + 7 days due date still applies to the balancing payment and the return.

Annual Accounting deadlines

Under the Annual Accounting Scheme, businesses make advance instalments (monthly or quarterly) based on estimated liability, and submit one annual return with any balancing payment due 2 months after the end of the annual period (unless HMRC specifies otherwise).

Late returns and late payments

Late submission and late payment are now penalised under regimes that took effect for VAT periods starting on or after 1 January 2023. Time to Pay arrangements (see below) can limit escalation of late payment penalties if agreed promptly.

Key Term: Time to Pay (TTP)
A formal instalment arrangement agreed with HMRC to clear VAT arrears. If agreed within 30 days of the due date and adhered to, it can prevent escalation of late payment penalties; interest continues to accrue until the liability is fully paid.

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 means maintaining core data in functional compatible software or spreadsheets connected to such software.
2. File VAT returns using MTD-compatible software via HMRC’s API. Manual typing into the HMRC VAT portal is no longer permitted for mandated entities, unless HMRC has granted a digital exclusion exemption.

Key Term: Digital Links
Electronic connections (for example, APIs, import/export, formulae, or secure file transfer) that move data between digital records and software without manual re-keying or copy-and-paste. Digital links are required across the entire VAT return preparation process under MTD.

MTD digital record requirements typically include:

• Business name, principal address, and VAT registration number.
• VAT accounting scheme(s) used.
• For each supply made or received: the time of supply (tax point), value excluding VAT, and VAT rate.
• Summary data required to populate each VAT return box.
• Any adjustments (e.g., partial exemption, error corrections) with the digital journey preserved via digital links.
• For PVA users, monthly CDS statements to support box 1 and 4 entries.

Bridging software can be used with spreadsheets provided digital links are maintained between source records and the final submission. Exemptions from MTD (e.g., on the grounds of digital exclusion) must be sought and agreed with HMRC.

Failure to comply with MTD obligations (for example, not using compatible software or not maintaining digital links) can lead to compliance interventions, direction notices, and penalties under general failure-to-keep-records or failure-to-submit regimes.

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, digital links, 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 (subject to limited alternatives).
• 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 (e.g., customs entries, export proofs, CDS statements for PVA).
• Records of adjustments, such as partial exemption calculations, capital goods scheme adjustments, bad debt relief, and correcting errors.
• Any credit notes or debit notes issued or received.
• For scheme users, the additional records required (e.g., Flat Rate Scheme turnover records; under cash accounting, cash received/paid dates).

MTD mandates that certain core data from these records must be held digitally and that data is digitally linked through to submission. The standard retention period for VAT records is a minimum of six years from the end of the relevant accounting period (longer for some capital items governed by the capital goods scheme).

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.

Correcting errors and disclosures

Businesses must correct VAT errors promptly. As a general rule:

• If the net value of errors is not more than the greater of £10,000 or 1% of the box 6 figure (subject to a cap, commonly £50,000), they can usually be corrected on the next VAT return by adjusting boxes 1 and/or 4 (and box 6/7 where relevant).
• Larger errors or those outside the correction window must be disclosed to HMRC separately (normally on form VAT652 or via digital equivalent), accompanied by an explanation and supporting calculations.
• Errors arising from lack of reasonable care, deliberate or concealed behaviour can attract inaccuracy penalties in addition to interest.

Keep working papers showing the nature of errors, calculations, and the period(s) affected.

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 2% applies to the amount unpaid at day 15; a further 2% applies to the amount unpaid at day 30 (effectively 4% if the full £10,000 remained unpaid throughout), i.e., £400 in total first penalties.
• A second late payment penalty accrues daily from day 31 at an annualised rate (4% per annum) on the outstanding amount until paid or a Time to Pay arrangement is agreed. For days 31–40 on £10,000, this daily element is added.
• Interest is also charged from the original due date until payment is made.

Worked Example 1.3

A business discovers it under-declared output tax of £6,000 in the last return and over-claimed input tax of £3,000 two returns earlier. Box 6 for the next return will be £800,000. Can it correct these errors on the next return?

Answer:
The net error is £9,000 (£6,000 + £3,000). The threshold for correcting on the next return is the greater of £10,000 or 1% of box 6 (here, 1% of £800,000 = £8,000), up to a maximum cap (often £50,000). The greater figure is £10,000; the net error is £9,000, which is below the threshold. The business can adjust the next return (increase box 1 by £9,000 and, if necessary, adjust boxes 6/7). Adequate working papers should be retained. If the net error exceeded the threshold, a separate disclosure would be required.

Worked Example 1.4

An importer uses Postponed Import VAT Accounting (PVA). In April, goods worth £50,000 are imported at 20% VAT. How are the return boxes affected?

Answer:
Using PVA, the importer accounts for £10,000 import VAT in box 1 and claims the same £10,000 (subject to normal input recovery rules) in box 4, resulting in no net cashflow effect for that element. The net value of imports is included in box 7. Monthly CDS statements must support the entries.

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), 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.

Key Term: Late Submission Penalty Points
A points system applied to late VAT returns. Thresholds: monthly (5 points), quarterly (4 points), annual (2 points). Each late return adds a point; reaching the threshold triggers a £200 penalty and any further late returns at the threshold incur £200 each. Points reset after a “compliance period” coupled with filing any outstanding returns.

Typical compliance periods before points reset: 6 months (monthly filers), 12 months (quarterly filers), 24 months (annual filers).

• 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: An additional 2% based on the amount outstanding at day 30; a second penalty at a daily rate (annualised at 4%) applies from day 31 on VAT still outstanding until paid or a TTP is agreed.

Key Term: Late Payment Penalty
A two-stage penalty: up to 2% at day 15 plus a further 2% at day 30 on outstanding amounts, then an ongoing daily penalty from day 31 at an annualised percentage until paid or a Time to Pay arrangement is agreed and maintained.

Entering a Time to Pay arrangement within 30 days of the due date can prevent escalation beyond the first penalty, provided payments are kept up. Interest still accrues until paid in full.

• 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 by behaviour and whether disclosure was prompted or unprompted. HMRC may suspend penalties for careless errors subject to conditions.

• Interest: Interest is charged on VAT paid late, accruing daily from the original due date until full payment. HMRC also pays repayment interest on VAT repayments from the later of the due date or the date the return is received until the repayment is authorised.

Worked Example 1.5

A quarterly filer misses two returns in a row due to internal system issues, then files the third return one day late. What late submission penalties apply?

Answer:
Each late return accrues one point. For quarterly filers, the threshold is 4 points. After three late returns, the business has 3 points but has not reached the threshold, so no £200 penalty yet. If a fourth return is submitted late before points are reset, the threshold will be reached and a £200 penalty charged. Points will only reset after 12 months’ compliance and filing any outstanding returns.

Worked Example 1.6

A business owes £50,000 for the March quarter. It agrees a Time to Pay arrangement with HMRC on day 25 and keeps to it. What late payment penalties apply?

Answer:
A first penalty of 2% on the amount outstanding at day 15 is likely to apply (2% of £50,000 = £1,000). Because a Time to Pay arrangement was agreed within 30 days and maintained, the second 2% element at day 30 does not apply, and the daily second penalty from day 31 does not accrue. Late payment interest still accrues until the debt is cleared under the TTP schedule.

Interaction with MTD and record keeping

Persistent MTD non-compliance (e.g., repeated failure to submit via API, absence of digital links) is treated as a compliance failure. HMRC can direct remedial steps and may impose penalties under the late submission regime, the failure to comply with a requirement, and/or inaccuracy penalties if record failures cause incorrect returns.

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 VAT account links records to return figures.
• The standard filing and payment deadline for quarterly electronic returns is 1 month and 7 days after the accounting period ends; direct debits are taken a few working days after if mandated.
• Making Tax Digital (MTD) requires most VAT-registered businesses to maintain digital records, retain digital links between data sources, and submit returns via MTD-compatible software (bridging software is acceptable).
• Businesses must keep VAT records, including VAT invoices and import/export evidence, for at least six years; additional records apply for special schemes and postponed import VAT accounting.
• Errors may be corrected on the next return if within the net error threshold; larger errors must be disclosed separately to HMRC.
• HMRC imposes penalties for late submission (points-based system), late payment (time-based, with daily accrual after day 31), and inaccuracies (behaviour-based); Time to Pay arrangements can limit late payment penalty escalation but not interest.
• Special schemes (Annual Accounting, Flat Rate, Cash Accounting) affect return frequency or how figures are computed; large payers may be required to make payments on account.

Key Terms and Concepts

• VAT
• VAT Return
• Output Tax
• Input Tax
• Accounting Period (VAT)
• VAT Account
• Making Tax Digital (MTD)
• Digital Links
• VAT Record Keeping
• VAT Invoice
• Postponed Import VAT Accounting (PVA)
• Annual Accounting Scheme
• Flat Rate Scheme
• Cash Accounting Scheme
• Payments on Account (POA)
• Late Submission Penalty Points
• Late Payment Penalty
• Time to Pay (TTP)