VAT returns without the panic: practical advice for London SMEs

VAT has a way of making small business owners feel they should already know more than they do.

In reality, plenty of London SMEs are figuring it out while also chasing invoices, serving customers, managing staff and trying to keep the business moving.

Yet VAT returns become really manageable once you break them into a routine.

You just need to know when VAT applies, what records to keep, how the returns work and where digital tools can make life easier.

Start with the basics

Thresholds

You must usually register for VAT when your taxable turnover goes over £90,000 in a rolling 12-month period.

You also need to register if you expect your taxable turnover to go over £90,000 in the next 30 days alone.

If you're already VAT-registered and your taxable turnover falls below £88,000, you may be able to cancel your registration. This is known as the deregistration threshold.

It doesn't happen automatically, and not every business will want to deregister, but it's worth knowing if your sales have dropped or your business has changed.

See GOV.UK for current VAT thresholds.

Rates

For many London SMEs, the main rate you deal with is the standard VAT rate of 20%.

That applies to most goods and services sold by businesses such as consultants, agencies, tradespeople, salons, event businesses and many retailers.

HMRC also has a reduced rate of 5% for some goods and services, and some supplies are zero rated, while other items are exempt from VAT altogether (see GOV.UK for current VAT rates).

Those categories aren't the same thing, and are often where people trip up.

• "Zero-rated" means VAT still sits within the system, but at 0%.

• "Exempt" means it sits outside normal VAT charging rules.

If you're not sure how your products or services should be treated, don't guess. Check the category properly or get advice before you build the wrong pricing into your business.

Good record-keeping makes VAT much less painful

The return itself is only as good as the records behind it.

HMRC expects VAT-registered businesses to keep a record of the VAT they charge on sales and the VAT they pay on purchases.

This is your VAT account, and it feeds the figures that go into your return. HMRC says your records must show:

• Total VAT sales.

• Total VAT purchases.

• The VAT you owe.

• The VAT you can reclaim.

• Where relevant, details such as Flat Rate Scheme calculations (see The Flat Rate Scheme below) or corrections to errors.

You also need to keep normal business records. That can include:

• Purchase invoices.

• Copies of sales invoices.

• Orders.

• Delivery notes.

• Till rolls.

• Import and export paperwork.

• Relevant business correspondence.

Generally, you must keep VAT records for at least six years.

Some habits to adopt

For a busy small team, the main issue is keeping records complete when the week gets hectic. A few habits help:

• Keep purchase invoices in one place, not across inboxes and piles of paper.

• Raise sales invoices promptly and save copies automatically.

• Reconcile your bookkeeping every month, not just at the end of the quarter.

• Flag anything unusual straight away, such as refunds, deposits or costs that are part-business, part-personal.

That kind of admin is rarely anyone's favourite job. But it's much easier to stay on top of VAT in small monthly chunks than in one panicked scramble.

How VAT returns usually work

Most VAT-registered businesses submit a VAT return every three months.

After each VAT period ends, you usually have one calendar month and seven days to submit the return and pay any VAT due to HMRC.

For example, if your VAT quarter ends on 31 March, the usual deadline for both filing and payment is 7 May. If the next quarter ends on 30 June, the usual deadline would be 7 August.

Filing and/or paying late can cost you. HMRC uses a points-based system for late VAT submissions, and a separate late payment penalty system for overdue VAT.

Penalties increase after 15 days and again after 30 days. HMRC also charges late payment interest from the first day the payment is overdue.

Common mistakes with VAT returns

The mistakes SMEs make aren't usually dramatic, but ordinary slip-ups:

• Missing receipts. If the invoice isn't valid, you may not be able to reclaim the VAT. HMRC says you can't reclaim VAT with an invalid invoice, a pro-forma invoice, a statement or a delivery note.

• Misclassifying sales. Some businesses assume everything will be charged at one rate when, in fact, some items are treated differently.

• Putting figures in the wrong quarter. VAT works on a tax point basis, which is the date a transaction counts for VAT purposes. Get that wrong and income or costs can land in the wrong return.

• Treating VAT money as spare cash. It isn't. If you collect VAT from customers, you're effectively holding some of that money until the payment is due to HMRC.

Making Tax Digital is now part of the job

All VAT-registered businesses should now be in Making Tax Digital for VAT unless exempt.

HMRC says VAT-registered businesses must keep certain records digitally and submit VAT returns using compatible software.

New VAT-registered businesses are generally signed up automatically unless exempt.

That might sound like one more thing to deal with, but in practice it can make life simpler for small teams.

Good digital records mean fewer missing documents, less manual rekeying and a clearer view of what's coming up.

Grow London Local recently ran a Making Tax Digital webinar that covers why the system exists, who it affects and the practical steps involved in keeping digital records and meeting the rules.

It's a useful watch if you want a clearer sense of what HMRC expects without wading through pages of guidance. 

Think about cash flow, not just compliance

One of the hardest parts of VAT is that the pressure often lands before the quarter-end deadline.

The business feels busy, sales are coming in and the bank balance looks healthy. But then the VAT bill arrives and suddenly the available cash isn't as available as it seemed.

The best fix is to plan for VAT every month, not every quarter.

Many SMEs move a percentage of sales into a separate savings account as they go, so the money is there when the bill falls due. It's a simple habit, but it takes away a lot of the stress.

Standard VAT accounting vs. the Cash Accounting Scheme

It's also worth understanding the difference between standard VAT accounting and the Cash Accounting Scheme.

Under normal VAT accounting, you usually account for VAT based on sales invoices and purchase invoices, even if the money hasn't been paid yet.

Under the Cash Accounting Scheme, you pay VAT on sales when customers pay you, and reclaim VAT on purchases when you pay your suppliers.

HMRC says businesses can use that scheme if their VAT taxable turnover is £1.35 million or less in the next 12 months.

If you're a business with slow-paying customers, cash accounting can help relieve some pressure. You aren't paying HMRC before you've actually been paid yourself.

It doesn't suit everyone, but it's worth knowing it's there if you need it.

The Flat Rate Scheme

The Flat Rate Scheme may also be an option for some SMEs with a taxable turnover of £150,000 or less excluding VAT.

Under that scheme, you pay HMRC a fixed VAT rate and usually can't reclaim VAT on purchases except for certain capital assets over £2,000.

The Flat Rate Scheme can make admin more straightforward, but it isn't automatically the cheaper option, so it needs proper thought.

When to get support with VAT

Don't struggle through VAT alone if your set-up is getting more complicated. A local accountant or tax adviser is worth considering when:

• Your turnover is moving close to the registration threshold.

• You sell a mix of goods or services with different VAT treatment.

• You trade online, import, export or sell across borders.

• You're regularly uncertain what you can reclaim.

• Cash flow is tight and VAT bills keep catching you out.

A good accountant can help you choose a better process, spot problems early and explain what is happening in plain English.

Conclusion

VAT returns tend to feel worse than they are. Most of the stress comes from last-minute filing, patchy records and not setting money aside.

Get the basics right, keep your records tidy, use digital tools properly and check anything unclear before it turns into a bigger problem.

The key to VAT is building a routine that stops it from taking over your working week.

Read more

• Grow London Local Money – resources and opportunities for small businesses

• Get ready for the new tax year

• WEBINAR: How to avoid costly mistakes with UK VAT

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