A step-by-step guide to organising your business tax return

VAT return preparation for a small business

It is a preconceived notion that Value Added Tax (VAT) is a huge burden for small businesses, but once you’re registered and as long as your business accounts are organised, it needn’t be too onerous.

Essentially a business that pays and charges VAT is acting as a tax collector for the government. A business hands over the difference between the amount of tax charged to customers and the amount that the business has paid to suppliers.

VAT returns are usually made on a quarterly basis, supported by a VAT account. All VAT invoices to customers during the period of the return are totaled to calculate the output tax; then all the VAT charged by suppliers is totaled to calculate the input tax.

VAT amounts are set off against each other, and the remainder is either paid by the business to HM Revenue & Customs (HMRC) or is claimed as repayment. However there are certain restrictions on what input tax can be claimed back on.

Tax cannot be claimed for:

  • Supplies for private use
  • Supplies for another company
  • Non-recoverable items, such as entertainment and cars, unless used solely for business purposes

Record keeping

The most important requirement for VAT registered businesses is accurate record keeping from the outset. It’s far easier to record whether an expense is for private use, entertaining or business at the time you enter it into your book-keeping/accounting system. If your records are correct, VAT returns take 30 minutes on a computerised system.

Most companies use computerised accounting systems and once set up these account for the VAT on each transaction as it’s made. Compiling a VAT return is thereafter an automated procedure which can take just a few minutes.

If you’re running a manual system then you should use different columns to list different VAT categories. Larger and specialised stationers sell special “spreadsheet”-style books with pre-printed columns for different VAT rates which are called “VAT analysis pads”. Many businesses keep manual records and then deliver these to their accountants. In these cases your accountant will discuss with you the best approach, as well as detailing how to treat the inputs and sales specific to your business.

You can help your accountant, and yourself, by noting on each invoice any special instructions. If, for example you have a £100 + VAT (£120) phone bill for your home address, this may be 100% business (an internet line, say), part business (because you’re on call, or as a fax line) or totally personal. If you note the reason on the invoice or receipt then you can be sure your records are in order against an inspection and your accountant can be sure the treatment is correct.

Paying VAT: options

Generally VAT returns work on a quarterly basis. Another option for small businesses is the Annual Accounting Scheme for VAT. To qualify the person must have been registered for at least 12 months and must not have a taxable turnover that exceeds £300,000 a year. This is ideal for small businesses who do not have many transactions.

The business will have to make nine monthly payments, which are based on the return paid the previous year. The business pays 10% of this amount by direct debit from the fourth to the 12th month of the VAT year. At the end of the tax year a final balancing payment is made if VAT is still due.

For businesses with turnover less than £100,000 annual accounting is even more simple. Four installments are made over the year equal to one-fifth of the previous year’s VAT bill. If the bill is less than £2,000 there is an option to make one payment when the annual return is made.

A person who is liable for tax can also pay VAT on the basis of cash received and paid rather than on the normal tax rules. The person cannot have a taxable turnover that is greater than £350,000 a year. The advantage of this payment process is that automatic bad debt relief is given, as VAT is not payable on a sale unless the customer pays for the goods.

Paying VAT: timings

Any VAT due is payable within one month of the end of the accounting quarterly period and within two months of the annual period. If the payment is late a warning is sent out and a Surcharge Liability Notice will be issued after the first late payment. If another late payment occurs during the 12 month period, a 2% surcharge may be added to the amount of VAT due.

Read more about VAT exemptions and why it’s worth planning for VAT from day one.