Understanding the VAT Control Account

The VAT control account is a ledger account that tracks all of your business’s VAT transactions. It records the VAT you charge on your sales (output VAT) and the VAT you pay on your purchases (input VAT). The balance in this account shows you whether you owe VAT to the government or are due a refund.

Example of a VAT Control Account

Company XYZ – VAT Control Account (Quarter Ending 30th June)

In this example, the credit side is higher, meaning the company has collected more VAT than it has paid, resulting in a VAT payable balance of £4,800.

The VAT Suspense Account

The VAT suspense account is a temporary holding account used to record the net VAT amount from your VAT return after it has been filed.

Here’s how it works:

1. Filing the VAT return: Once you’ve filed your VAT return, the net amount of VAT you owe or are due to reclaim is moved from the VAT control account to the VAT suspense account.
2. Holding the amount: The VAT suspense account holds this amount until it’s settled. If you owe VAT, the payment will be made from this account. If you’re due a refund, the refund will be paid into this account.
3. Settlement: When you pay the VAT you owe or receive your refund, the corresponding amount is cleared from the VAT suspense account.

In essence, the VAT suspense account bridges between filing your VAT return and settling your VAT balance with the tax authorities.

VAT On The Balance Sheet

The balance of the VAT control account typically appears in two places on the balance sheet, depending on whether you owe money or are due a refund:

Current Liabilities:

If the VAT control account has a credit balance (meaning you owe VAT to HMRC), it will appear as a current liability. It may be listed as:

• VAT Payable
• VAT Liability
• Accrued VAT

This reflects that the VAT owed is a short-term debt due to the government.

Current Assets:

If the VAT control account has a debit balance (meaning HMRC owes you a VAT refund), it will appear as a current asset. It might be listed as:

• VAT Receivable
• VAT Refund Due

Accounting Software for VAT

Accounting software like QuickBooks or Xero significantly streamlines the management of VAT returns and control accounts, offering several benefits:

Automated Calculations:

• VAT Calculation: Software automatically calculates VAT amounts based on the applicable rates, eliminating the risk of manual errors.
• Control Account Updates: Transactions are posted to the VAT control account in real-time, providing a continuously updated view of your VAT position.

Streamlined Record Keeping:

• Digital Records: All invoices, receipts, and transactions are stored digitally, reducing the need for physical paperwork and making it easier to retrieve information for audits.
• Linked Transactions: Purchase and sales invoices are linked, ensuring accurate VAT allocation and simplifying reconciliation.

VAT Return Preparation:

• Pre-filled Returns: Software can pre-fill VAT returns based on the data in your control account, saving time and reducing the risk of errors.
• Error Checks: Built-in validation checks help identify discrepancies before submitting the return.

Reporting and Analysis:

• VAT Reports: The software generates detailed reports on VAT liabilities, reclaimable amounts, and historical trends to improve decision-making.
• Customisable Reports: You can create customised reports tailored to your specific needs.

Integration with HMRC:

• Making Tax Digital (MTD) Compliant: Most accounting software is designed to comply with MTD requirements, allowing for direct submission of VAT returns to HMRC.
• Reduced Manual Input: Software can automatically retrieve information from HMRC, reducing the need for manual data entry.

VAT Control Accounts Conclusion

Understanding and managing your VAT control account is crucial for maintaining accurate financial records and ensuring compliance with tax regulations. By leveraging accounting software and adhering to best practices, you can streamline your VAT processes, minimise errors, and focus on growing your business.

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What is Making Tax Digital (MTD)?

Making Tax Digital (MTD) is a new initiative by the UK government to make it easier for businesses to submit accurate and timely VAT returns. All VAT-registered businesses should be signed up and submit their returns to HMRC digitally.

By using MTD software, businesses can take advantage of an array of features such as automatic calculations, digital records, and submission options. MTD will also help businesses keep up with their VAT obligations and remain compliant with the HMRC.

Free MTD Software Options

There are two main options Accounting software and Bridging Software. Accounting software is all-in-one for completing your accounts, including invoicing, expenses and reports.

Bridging software allows you to keep your existing software or Excel Spreadsheets and link it up to HMRC systems. It acts as a bridge between your current system and HMRC.

Free Making Tax Digital Software Options

As a small business owner, you might be looking at keeping costs down and looking for free accounting software that is VAT MTD Compliant. Here are some of the top free software solutions that we recommend:

Free Making Tax Digital Accounting Software

A fully integrated accounting package helps you manage your finances and meet Making Tax Digital obligations.

FreeAgent

If you bank with NatWest or Royal Bank of Scotland, you can get a free account with FreeAgent and have access to all the features.

FreeAgent is an award-winning package that is easy to use and includes all the features you need to manage your business finances, including:

• Automatic bank feeds
• Tax calculations and submissions
• Invoicing and expenses
• Self-assessment tax returns
• VAT return online

The paid version is £29.00 per month.

Zoho Books

Zoho Books offers a free plan for revenue below £35,000. It is designed for freelancers and small businesses, with features such as:

• Automated bank feeds
• Invoicing and expenses
• Tax calculations and submissions
• Cash flow projections
• VAT Returns

The paid version starts from £10.00 per month. One advantage of Zoho Books is that as your business grows, they have over 40 apps to integrate, which covers most aspects of running a business.

Pandle

Pandle is a free online accounting package designed for small businesses. It offers all the features needed to manage your finances and easily submit your VAT returns digitally:

• Invoicing and expenses
• Recurring transitions
• Bank Imports
• VAT return

The Pro version is only £5 per month and offers bank feeds, cash flow forecasting and receipt uploads.

Free Making Tax Digital Bridging Software

If you use Excel spreadsheets for your bookkeeping, there is an option without transferring to accounting software. You can use bridging software. These are pieces of software that act as a bridge between your current system and HMRC and therefore submit your VAT return electronically.

Anna Money

Anna Money is a free bridging software solution allowing you to stay with your existing system, such as Excel spreadsheets, and submit your VAT return digitally to HMRC.

You sign up for a free account and download the VAT submission template. The template is then uploaded to Anna money and submitted to HMRC. They plan to keep the service free and offer a business account with invoicing, expenses and debit cards for either pay-as-you-go or £14.90 per month.

My Tax Digital

My Tax Digital is an Open source product, meaning it has been developed by the community, not by a commercial company. It is free to use and lets you digitally submit your VAT return to HMRC.

When you sign up, you can use their income and expenses to produce an automated VAT calculation or to upload the VAT figures and submit a VAT return using the bridging software.

Paid Options For VAT Registered Businesses

Paid options are available if you are a larger business and need a complete accounting package that makes Tax Digital compliant.

Xero

Xero is an online accounting software package for small businesses, which includes features such as invoicing and payments, linking a bank account, expense tracking, payroll, project management and bank reconciliation.

Xero is popular with small business owners, bookkeepers and accountants.

FreshBooks

FreshBooks is an online invoicing and bookkeeping solution for freelancers, small businesses and entrepreneurs.

It includes projects, expenses, time tracking and MTD VAT returns.

MTD for Self Employed

The next stage for making tax digital is for the self-employed to submit their quarterly accounts to calculate Income Tax and National Insurance.

The dates for the introduction are:

6th April 2026 for income above £50,000

6th April 2027 for income above £30,000

MTD Compliant Software Conclusion

Many options are available to help businesses become MTD compliant and submit a VAT return. Whether you choose a free or paid option depends on the size and needs of your business.

If you’re starting, Zoho Books and Pandle provide excellent free basic packages. Anna Money or My Tax Digital is a perfect choice if you need bridging software that allows you to stay in Excel spreadsheets.

Whatever solution you decide upon, it will be worth ensuring that your accounting system meets all of HMRC’s digital VAT return submissions requirements.

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In this blog post, we will explain everything you need to know about VAT so that you are up-to-date on the rules and ensure compliance. From tax rates to registration thresholds, find out all the key facts, so your business benefits from complying with relevant laws.

What is Value-Added Tax (VAT)?

Value-added tax is a taxation that businesses must add to their sales if registered. VAT is collected by businesses from customers and then paid directly to HMRC. We all pay VAT on goods and services we purchase, but sometimes you do not realise that you are being charged for it as it becomes part of the price.

VAT is a consumption tax, which is a tax based on how much goods or services you consume. The more you consume, the more you will pay.

How does VAT work for small businesses in the UK?

Value Added Tax (VAT) is something that small businesses need to think about. It is a tax that people have to pay when they buy most goods and services. VAT is calculated as a percentage of the overall sale price and must be collected and paid to the government.

Businesses that make sales and are over the VAT threshold must register with HMRC and charge VAT on goods or services they sell. At the same time, any registered business that pays out for goods/services reclaims the VAT on purchases on their VAT return.

Knowing how VAT works for small businesses can help ensure your business complies with taxes, giving you peace of mind when running your business.

How can small businesses claim back VAT they’ve paid on business expenses?

VAT-registered businesses reclaim VAT by completing a quarterly VAT return. This means businesses pay the net balance of VAT due or repay any overpaid VAT.

When claiming back VAT, businesses must keep all receipts and invoices for six years for audit purposes. HMRC can conduct a tax audit anytime, so maintaining good records is essential.

If you are a startup on your first VAT return, you can reclaim VAT on business expenses incurred up to four years before registering for VAT. It includes reclaiming services like legal fees to get the business running and capital expenses, including computers and other equipment.

The benefits of registering for VAT

Registering for value-added tax (VAT) is a great way to stay compliant with the applicable laws in your country or region. By registering for VAT, you can reclaim the amount of input VAT on most business expenses, such as materials and services. For some businesses, if you have made a large purchase, for example, new equipment or stock, you might be due a refund.

Some businesses will only deal with VAT-registered companies, allowing them to reclaim the VAT on the purchases of goods and services.

Disadvantages of Being VAT Registered

Although if you have reached the VAT threshold, you must register for VAT, there are also times when you can register voluntarily. Voluntary VAT registration might seem like a good idea, but there are some disadvantages.

• Administration – As a VAT-registered business, you must complete quarterly VAT returns and keep up-to-date records of all transactions.
• Higher Prices – If you are registered for VAT, you must charge it on all taxable sales and services. This can make your products or services more expensive, which could put customers off.
• Cash Flow – When you are registered for VAT, you must pay the amount of tax collected to HMRC within 1 calendar month and 7 days. You must, therefore, ensure that the money is available.

What is the VAT Threshold?

If you’re a business owner in the UK, it’s essential to be aware of the VAT threshold so that you register on time. The VAT threshold is £90,000, and it applies if, by the end of any month, your total VAT taxable turnover for the last 12 months was over this amount. You must register within 30 days of the month that you go over the threshold.

If the business exceeds the threshold temporarily, it is possible to request an exemption from HMRC. You must write to HMRC with evidence showing that you do not expect to go over the deregistration threshold of £83,000 in the next 2 months.

Failing to register when your profits reach this threshold could mean paying hefty fines or penalties.

How to register for VAT

For businesses with VATable turnover, to register, you’ll need a Government Gateway user ID and password, and you can usually do it online within minutes. Upon registering, you’ll also get access to your VAT online account.

Alternatively, you may appoint an agent to submit VAT returns and other dealings with HMRC on your behalf. If you use an agent, you can still register for an online account after receiving the VAT number.

When you are registered for VAT, you will receive a VAT registration certificate and details of when the business is registered from and when you need to start charging VAT on your goods and services. The VAT certificate includes the VAT registration number.

VAT and Making Tax Digital

Joining the rest of Europe, HMRC’s Making Tax Digital (MTD) program was introduced to help make tax returns easier for UK business owners. As such, MTD requires VAT returns to be electronically submitted via accounting software compatible with the program.

It is important to note that using this accounting software does not mean you cannot access any vital information about your return; it just helps streamline the process and provide more convenient access. It is also noteworthy that filing a VAT return with HMRC through any other means is no longer possible due to the introduction of MTD unless you have an exception.

UK VAT Rates Explained

VAT rates are divided into four categories: standard, reduced, 0% and exempt.

It’s worth taking the time to understand which VAT rate applies to what you’re buying or selling. That way, you can ensure you meet all the necessary obligations regarding VAT tax rates in the UK. A complete list of VAT rates is on the HMRC website.

VAT Calculation Example

There is a simple formula that you can follow for each VAT rate. You multiply the VAT exclusive price by 1 + the VAT rate divided by 100. Below are the simple formula and examples using 200.

20% Multiply by 1.2 = 240

5% Multiply by 1.05 = 210

If you remember this formula, it is much easier to calculate the VAT-inclusive price.

VAT Calculator

To make it easier to work out the VAT, we have created 2 VAT calculators. The first is for VAT-inclusive prices; when you enter the inclusive amount and VAT rate, it will calculate VAT-exclusive prices. The second is the opposite way, enter the VAT exclusive, and it will calculate both the VAT and the price excluding VAT.

What are the UK VAT Schemes

Different VAT schemes are available depending on the size and type of business in question. Below is a brief description of each scheme:

Standard Accounting Scheme

The main scheme is for standard VAT for larger businesses. The VAT is calculated when you invoice someone or receive a bill from a supplier.

Flat Rate VAT Scheme

Small businesses can simplify their VAT affairs by opting for the flat rate scheme – wherein a preset percentage is applied to all income regardless of expenditure outlay. Each business pays a fixed rate of VAT, depending on the type of business. You still charge VAT at the standard rate on all the goods and services provided.

Cash Accounting Scheme

The cash accounting scheme allows businesses to pay VAT on goods or services when they receive payment from customers and claim it back when they pay their suppliers. This scheme is suitable for businesses with lower turnover.

Annual Accounting Scheme

The annual accounting scheme is for businesses with a turnover below £1.35 million. You submit one VAT return yearly rather than four and make payments in advance.

Marginal Scheme

The marginal scheme lets you calculate the VAT on the value you added to goods you resell. This scheme is mainly for second-hand goods, antiques and collector items.

Record keeping and submitting returns for VAT registered Businesses

Accurate record-keeping is one of the most critical tasks for any VAT-registered business. This means keeping detailed records of all transactions that are subject to VAT. This includes all invoices and receipts for all goods and services. The best way to keep accurate records is by using accounting software or engaging an accountant’s services.

These records must be kept for at least six years if HMRC requests them for inspection or an investigation into your business.

A VAT return must be submitted every three months by any business that is registered for VAT (unless you are on the annual scheme). The return is submitted via accounting software or bridging software; all VAT returns are now completed electronically.

VAT returns are due 1 month and seven days after the VAT quarter. For example, your VAT period is from 1st January to 31st March, and your return is due on 7th May.

What information must I include in a VAT invoice?

For VAT-registered companies, specific details must be included on the invoices.

You should include the following:

• A unique invoice number that will identify the document
• The date of supply
• Date of issue for the document if different to the date of supply
• Your business name, address and VAT registration number
• The customer’s name and address
• A full description of the goods or services provided, quantity, unit price and VAT rate
• The total amount charged for the goods/services, including any discounts given
• The total amount of VAT charged
• Gross amount of the invoice
• The reason for any zero or VAT-exempt items

To ensure that an invoice shows all of this information, it is recommended to use accounting software. HMRC have a complete list available.

VAT Direct Debit

If you want peace of mind that your VAT bill will be paid on time, it is possible to set up a direct debit. To ensure payment is taken, it must be set up 3 working days before you submit the VAT return online.

The direct debit will be taken 3 working days after the payment deadline or, if it is filed late 3 days after the return is filed.

Common mistakes made by small businesses with VAT

Some of the most common mistakes for VAT are:

• Not registering for VAT when the requirement to do so arises
• Charging customers the wrong rate of VAT or not charging any at all
• Not being able to account for all of the VAT charged and paid
• Not keeping accurate records
• Late submission of returns
• Late VAT payments

What is the Difference between VAT Exempt and Zero Rate VAT

VAT-exempt items are those goods and services that are not subject to any rate of VAT. This includes some healthcare services and educational fees.

Zero-rate VAT is applied to certain items that would usually have VAT, but it is set to zero. This includes children’s car seats and books.

VAT Penalties

Missing a VAT return or payment deadline can be stressful, especially if it is a busy time for the business.

If you’re late in sending your return, you will start a 12-month surcharge period. There is nothing to pay for the first late return, but you may have to pay a surcharge on other late returns.

Late VAT payments may also be charged interest. HMRC will let you know how much you need to pay in surcharges and VAT.

VAT FAQ

What is Input Tax?

Input tax is the amount of VAT that a business has paid to its suppliers on purchases. This can then be claimed back from HMRC when your business submits a VAT return.

What is Output Tax?

Output tax is the amount of VAT that is charged to customers when goods and services are sold. This is collected by the business and then passed to HMRC when a VAT return is submitted

What is the tax period?

The tax period is the length of time between two successive VAT returns and can be up to one year; most businesses have a 3-month tax period.

Can I claim a tax refund?

Yes, if your business is VAT registered and you have paid more than you received in the same period, you can claim a tax refund.

How does VAT work? Conclusion

In order to ensure accuracy in your tax reporting and to stay compliant with HMRC regulations, it is important to understand the basics of VAT.

This includes understanding when to register for VAT, what goods and services are subject to VAT, the different rates that can apply, and what information must be included on invoices. It is also advisable to familiarise yourself with common mistakes businesses make regarding VAT and how to set up a direct debit for payment.

Finally, for any VAT-registered company, always consult an accountant or professional if you have any questions about your business’s VAT obligations.

The post How does VAT Work for Small Businesses in the UK? appeared first on Business Accounting Basics.

The first phase of making tax digital VAT will come into force from April 2019. HMRC had delayed the date, but they are now working closely with software companies to achieve the new deadline.

Making Tax Digital what does it mean for me?

If your business has income over £85,000 per year, you must register for VAT. All VAT registered businesses over the threshold must use an accounting package to upload their VAT to HMRC’s records from April 2019. At the moment around 71% still log in to HMRC to declare VAT.

What costs are involved?

If your small business already uses an accounting package, check if they are going to meet the deadline. Most of the well-known ones are already on the list including Quickbooks, Sage, Xero, Clearbooks and Quickfile. Each of these packages has a monthly subscription which will vary depending on the size of business, amount of transactions and if you require any add-on features.

For a business not using accounting software the first step would be to talk to your accountant to see if they recommend a package. On the whole, most accountants will be able to use any accounting software, but a few have their favourites. The first step would be to take a free trial to see if the package suits your business needs.

Can I complete MTD VAT Myself?

If you are confident with setting up and using the software, there is no reason why not. Many businesses both self-employed or Limited company run their accounts internally. To ensure you do not get charged penalties, and interest VAT deadlines are important.

Making Tax Digital VAT – Free Software

One of the best free accounting software packages I have used as a bookkeeper is Pandle. I recommend it to small businesses and enterprises as it is fairly easy to setup and use. Pandle are planning to comply to HMRC for making tax digital VAT when it comes into force, but worth checking with support before using it. Pandle offers most of the features that a subscription package has including invoicing, statements, VAT and reports. It has some paid for features which include an automatic bank feed, forecasting and projects.

MTD below the VAT Threshold

If you are below the £85,000, the deadline will not affect you, but it is worth preparing in advance to switch to digital accounting. One of the concerns in the bookkeeper’s forums is that there will be a large influx of businesses needing help to become compliant. Bookkeepers can already have enough clients that they can’t take on any more work.

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