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What is VAT returns and how does it work.

Updated: Mar 7, 2022

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VAT is present in almost every commercial activity. We hear about it, we talk about it, but what is it? And more importantly, how and when should I apply for VAT returns? This post will give you an easy introduction to VAT and VAT returns.

VAT stands for “value added tax” and it is one of the main sources of the government income. It is administered and collected by HM Revenue and customs, or HMRC. The value of the tax varies on what is subjected to it. The standard rate is 20%, but there are some goods and services that has reduced rate of 5%, and others that have a 0% rate, such as children’s clothing. It is applied to most goods and services, although there are things that are exempt of it such as education.

When you own a VAT registered business, that is almost any kind of business, you can claim the VAT you have paid on business purchases and expenses. You must submit a VAT return form even if you do not have any VAT to claim or pay. But now the question is: can I reclaim everything? The quick answer is no, you cannot. Firstly, it must be used for business. If it could also have a personal use, you must explain how it was used in a business environment. For example, if you are a hairdresser that want to submit some hairbrushes, you will have to explain that they are indeed used in your hair salon. There are some special cases that works differently when reclaiming its VAT like cars related expenses, such as buying one, repairing or fuel costs; travel expenses, such as accommodation or transport, and businesses that are partly exempt from it, as it could be an insurance carrier. Lastly, you cannot reclaim VAT on entertainment expenses, or purchases in which you used the VAT Flat Rate Scheme.

The VAT returns due date depends on the business and the scheme that you own. You can check your deadline on your account in the HMRC. Business usually do it 4 times a year, that is every 3 months. But you can also join the VAT Annual Accounting Scheme, that will allow you to submit just one VAT return a year. You are eligible to enter if your estimated VAT taxable turnover is £1.35 million or less in a year. No matter which way you choose to do it, it is key that you save your receipts as you will have to prove and write the exact value. That can be messy without help, that is why we encourage you to hire a professional assistance like Evolveva Solutions that can keep track of everything so you can focus on what is important: your business.

The last important thing to know when you are beginning is how you can submit it. The VAT returns must be submitted online. For it you will need a VAT number and online account as the one mentioned before. There are some accounting software that let you submit it directly, without putting the figures individually in HMRC’s online services. You can also submit it in person, but just if you fit in one of this three categories: if your business is subject to an insolvency procedure, unless you have a Company Voluntary Arrangement or an Individual Voluntary Arrangement; if your religion objects to the use of computers, or if you cannot because of your age, a disability or also if there is a lack of internet in your area. If you below in one of this categories you must contact with the HMRC in order to find a solution. Click here to find the ways in which you can contact them.

In brief, VAT returns is one of the things that you just must do when owning a business. It is a very time-consuming task, and you have to be very careful to keep all the receipts and invoices, hence the need to have someone that can be in charge of this gruelling task.

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