VAT Return Explained: How to Complete, Submit and Pay Your Return to HMRC Correctly

1. What a VAT return is and why you need to file one?

A VAT return is a digital form you submit to HMRC – usually every three months – reporting how much VAT you charged on your sales and how much VAT you paid on your purchases.

The difference between these two figures determines if you owe HMRC money or HMRC owes you a refund.

The amount of VAT you charge customers is called output VAT. The VAT you pay to suppliers on business expenses is called input VAT. Your VAT return brings these together into a single net figure – the net VAT to pay or reclaim.

If you collected more VAT from customers than you paid to suppliers, you pay the difference to HMRC.

If you paid more VAT on purchases than you charged on sales, HMRC will refund the difference to you. Either way, every VAT-registered business must submit a VAT return for every accounting period, even if the figures are zero.

2. Who needs to submit a VAT return?

You must register for VAT and start filing returns once your taxable turnover exceeds £90,000 over any rolling 12-month period. This threshold applies to all business structures:

• sole traders
• partnerships and
• limited companies

alike.

There is also a forward-look test.

If you have reasonable grounds to expect your taxable turnover will exceed £90,000 in the next 30 days alone (for example, because you have signed a large project contract), you must voluntarily register for VAT before that 30-day period begins.

Once you are VAT registered, you are required to submit a VAT return for every accounting period, regardless of whether you made any sales, incurred any expenses, or have any VAT to pay or reclaim.

A nil return is still a mandatory filing!

If you registered for VAT voluntarily – perhaps because most of your clients are VAT-registered businesses and you want to reclaim input VAT on your purchases – the same filing obligations apply.

Voluntary registration is not optional filing. You are on the same schedule and subject to the same rules as every other VAT-registered business.

3. What goes in each box of your VAT return?

👉 Find your VAT form on HMRC

Your VAT return has nine boxes.

Each one captures a different piece of your VAT picture for the quarter. Getting the right figures into the right boxes is the core task of completing a VAT return, and the most common errors happen here.

To make this practical, the examples below follow a UK-based freelance graphic designer with £25,000 in standard-rated sales during the quarter, £1,200 in business purchases (all standard-rated), and no imports or Northern Ireland trade.

Boxes 1 to 3: VAT You Owe

Box 1 records the total VAT due on all your sales and other outputs for the period. This is your output VAT – the VAT you charged to customers on your invoices. If you sold £25,000 of standard-rated design services, you charged 20% VAT, making Box 1 equal to £5,000. Box 1 also includes any VAT due under the reverse charge, like if you received services from an overseas supplier or construction services under the domestic reverse charge.

Box 2 covers VAT due on acquisitions of goods from EU member states. This only applies if your business is based in Northern Ireland and you acquired goods from the EU under the Northern Ireland Protocol.

Box 3 is the total of Box 1 and Box 2. In our designer’s case, Box 3 is £5,000.

Boxes 4 to 5: VAT You Can Reclaim

Box 4 is the total VAT you can reclaim on your purchases and other inputs – your input VAT. This includes VAT on business expenses, equipment, software subscriptions, and any import VAT accounted for through postponed VAT accounting. Our designer spent £1,200 on supplies at 20% VAT, so Box 4 is £240.

Box 5 shows the net VAT to pay or reclaim. It is Box 3 minus Box 4. If the result is positive, you owe HMRC. If negative, HMRC owes you a refund. For our designer: £5,000 minus £240 equals £4,760 payable to HMRC.

Boxes 6 to 7: Total Sales and Purchases Excluding VAT

Box 6 is the total value of all your sales and other outputs, excluding any VAT. Include zero-rated and exempt supplies here as well as standard-rated ones. For our designer with £25,000 in sales, Box 6 is £25,000.

Box 7 is the total value of all your purchases and other inputs, excluding VAT. Include zero-rated and exempt purchases alongside standard-rated ones. Our designer’s Box 7 is £1,200.

Boxes 8 to 9: Northern Ireland to EU Member States

Box 8 records the total value of supplies of goods (excluding VAT) from Northern Ireland to EU member states. Box 9 records the total value of acquisitions of goods (excluding VAT) from EU member states to Northern Ireland. If your business operates entirely within Great Britain and has no Northern Ireland trade, both boxes are zero.

4. How to calculate the VAT on your return?

Calculating VAT is straightforward when all your sales and purchases are standard-rated. You take the VAT on everything you sold (output VAT), subtract the VAT on everything you bought for the business (input VAT), and the difference is what you pay or reclaim.

The standard VAT rate is 20%. If you sell a service for £1,000 plus VAT, you charge £200 in VAT. That £200 goes into your output VAT total. If you then buy £300 worth of software for the business and pay £60 in VAT, that £60 goes into your input VAT total.

Things get more complex if you make both taxable and exempt supplies.

This is called partial exemption.

If some of your income is exempt from VAT (certain financial or insurance services) you cannot reclaim all of your input VAT. Instead, you use a partial exemption method to calculate what proportion is reclaimable. Most creative businesses deal entirely in taxable supplies, but if you earn any exempt income, speak to your accountant about whether the de minimis limits apply before completing your return.

The flat rate scheme simplifies the calculation entirely. Instead of tracking input and output VAT separately, you pay HMRC a fixed percentage of your gross turnover. The percentage depends on your business sector. Under this scheme, you do not reclaim VAT on purchases (with limited exceptions for capital goods over £2,000 including VAT).

5. VAT schemes that change how you report

The standard VAT method is not the only option. HMRC offers several schemes that change what you put on your return and when you pay. 

The table below summarises how each VAT scheme changes your reporting obligations:

Flat Rate Scheme

The flat rate scheme lets you pay a fixed percentage of your gross turnover to HMRC instead of calculating the difference between output and input VAT. The percentage varies by industry.

You can join if your VAT taxable turnover is £150,000 or less (excluding VAT). In your first year of VAT registration, you get a 1% discount on the flat rate percentage. You do not reclaim VAT on most purchases under this scheme, which means your VAT return becomes significantly simpler. The trade-off is that if your expenses are high relative to your turnover, you may pay more VAT than under the standard method.

Cash Accounting Scheme

Under cash accounting, you account for VAT based on when you receive payment from customers and when you pay your suppliers, not when you issue or receive invoices. This is useful if you have long payment terms or clients who pay slowly, because you do not owe HMRC output VAT on invoices that have not been paid yet.

You can use cash accounting if your estimated VAT taxable turnover is £1.35 million or less. You must leave the scheme if your turnover exceeds £1.6 million.

Annual Accounting Scheme

The annual accounting scheme lets you submit one VAT return per year instead of four, and make interim payments towards your VAT bill throughout the year. You either make nine monthly payments or three quarterly payments, then settle the balance when you file your annual return.

You can join if your estimated VAT taxable turnover is £1.35 million or less. This scheme suits businesses with predictable turnover who prefer spreading their VAT payments evenly.

6. When your VAT return and payment are due

Your VAT return deadline is usually one calendar month and 7 days after the end of your accounting period. The accounting period is the three-month window your return covers.

For a business with a standard quarterly period ending 31 March, the return and payment are due by 7 May. For a period ending 30 June, the deadline is 7 August. The 7-day extension applies to electronic filing and payment, which covers everyone filing through MTD-compatible software.

If you fall within the payments on account regime – which applies to businesses that regularly owe more than £2.3 million in VAT per year – the 7-day extension is lost. Your return and payment are due one calendar month after the period end, with interim payments due at the end of months two and three of each quarter.

If you use the annual accounting scheme, your annual return is due two months after the end of your VAT accounting period.

HMRC will also notify you of upcoming deadlines, but relying on reminders alone is risky.

7. What happens if you file or pay late?

HMRC treats late filing and late payment as separate offences, each with its own penalty regime. You can be penalised for both simultaneously if you miss both the submission and payment deadlines.

Late Submission Penalty Points

Since January 2023, late VAT return submissions are handled through a points-based system. Each time you file a return after the deadline, you receive one penalty point. Once you reach the threshold for your filing frequency, you are charged a fixed £200 penalty, and another £200 for every subsequent late return while you remain at the threshold.

The penalty point thresholds are set by your accounting period:

To reset your points, you must meet two conditions:

1. Submit all returns on time for a continuous compliance period – 12 months for quarterly filers
2. Submit all outstanding returns from the previous 24 months

Once both conditions are met, all your points are removed.

Late Payment Penalties

Late payment penalties are percentage-based and calculated on the amount of VAT outstanding at specific milestones.

If your payment is up to 15 days late, no penalty is charged – provided you pay in full or agree a Time to Pay arrangement with HMRC within that window. If payment is between 16 and 30 days late, you are charged a penalty of 3% on the VAT owed at day 15. If payment is 31 or more days late, you are charged 3% on the VAT owed at day 15, plus an additional 3% on the VAT still owed at day 30.

From May 2025, the ongoing daily penalty rate for payments outstanding beyond 30 days increased from 4% to 10% per annum – a significant jump. This rate accrues daily until you pay in full.

Late Payment Interest

On top of penalties, HMRC charges interest on any VAT paid late. The interest rate is the Bank of England base rate plus 4%, and it accrues from the day after the payment deadline until the day HMRC receives your payment. 

If you know you cannot pay on time, contact HMRC before the 15-day mark to arrange a Time to Pay agreement.

8. How to correct errors on a previous VAT return

If you discover an error on a previous VAT return, you can usually correct it by adjusting the figures on your next return – but only if the net value of the error is £10,000 or less, or is between £10,000 and £50,000 and does not exceed 1% of your Box 6 figure (total sales excluding VAT) for the current period.

For errors above these thresholds, or if you prefer, you can report the error directly to HMRC using an online service. There is a four-year time limit for correcting errors from the date the return was due.

HMRC can charge penalties of up to 100% of the tax understated or overclaimed if you submit an inaccurate return. The penalty percentage depends on the nature of the error, and whether it was:

• careless
• deliberate or
• deliberate with concealment.

Telling HMRC about an error yourself (unprompted disclosure) reduces the penalty range compared with HMRC discovering it during an HMRC compliance check.

9. How to reclaim VAT and when HMRC will issue a refund

Getting your VAT return right every quarter keeps HMRC off your radar and keeps your cash flow predictable.

If you run a creative business (freelancing, directing a limited company, or managing an agency), WallsMan Creative can handle your VAT compliance alongside your wider tax planning.

We specialise in accountancy for the UK creative sector and understand the specific challenges that come with project-based income, international clients, and variable quarterly turnover.