Value Added Tax (VAT) is one of the main taxes applied to business transactions in the United Kingdom. It affects how companies price and sell their goods and services, how they manage records, and how they report tax to HM Revenue & Customs (HMRC).

What Is VAT and How It Works

Value Added Tax (VAT) is an indirect tax charged on most goods and services sold in the UK by VAT-registered businesses. It’s “indirect” because businesses collect it on behalf of the government — the customer pays it, and the business passes it to HMRC. Registered businesses can usually recover (reclaim) the VAT they pay on business purchases, provided those purchases relate to taxable supplies.

How VAT is Charged

hen a business is VAT-registered:

• It adds VAT to the price of what it sells (output tax).
• It reclaims VAT paid on goods and services it buys for its business (input tax).
• The difference between output tax and input tax determines what the business must pay to HMRC or reclaim from HMRC at the end of a VAT period.

VAT is charged at the appropriate rate defined by HMRC depending on the goods or services supplied. Some supplies are standard-rated, reduced-rated, zero-rated, or exempt, based on HMRC rules.

Who Must Register for VAT

A business must register for VAT with HMRC when its taxable turnover exceeds the current VAT registration threshold, or if it expects to go over that threshold within 30 days

VAT Registration Threshold (Currently £90,000)

• A business must register if its taxable supplies in the last 12 months exceed £90,000.
• Alternatively, if it reasonably expects turnover above £90,000 in the next 30 days, it must register before that period ends.
• Turnover counts only taxable supplies (not exempt supplies).

Once registered, the business must:

• Charge VAT on taxable supplies,
• Issue VAT invoices (unless exempt),
• File VAT returns regularly, and
• Pay VAT due to HMRC.

If it fails to register when required, HMRC may charge VAT from the date it should have registered and penalties may apply.

VAT Returns and Quarterly Submission

VAT-registered businesses must file VAT returns to report how much VAT they’ve charged and paid during their accounting period.

Quarterly Reporting

• Most businesses submit a VAT return every 3 months — this is the usual “accounting period.”
• The VAT return must be submitted online using HMRC-compatible software, a requirement introduced under Making Tax Digital (MTD).

Deadlines and Payments

• The deadline to submit your VAT return and make any payment due is usually one calendar month and seven days after the end of the VAT accounting period.
• For example, if the period ends on June 30, the return and payment are due by August 7.

Even if no VAT is owed or reclaimed, a return must still be filed for every period. Returns show:

• VAT on sales (output tax)
• VAT on purchases (input tax)
• The net amount payable or reclaimable with HMRC.

If returns are late or inaccurate, HMRC may levy penalties and interest — exact amounts depend on how late or inaccurate the return is.

Making Tax Digital (MTD) for VAT Making Tax Digital (MTD) for VAT

Making Tax Digital (MTD) is a major UK government initiative aimed at modernising how tax is reported and administered, making it simpler and more accurate for taxpayers while reducing errors and the “tax gap”.

MTD for VAT — How It Applies

• MTD for VAT was first introduced in April 2019 for larger VAT-registered businesses (with turnover above the VAT threshold).
• Since April 2022, all VAT-registered businesses must follow the digital reporting rules for VAT, no matter the size of the business.

Under Making Tax Digital for VAT:

• VAT records must be kept digitally in software that is compatible with HMRC’s digital systems.
• VAT returns must be submitted digitally via software, not by paper or manual entry in HMRC’s old portal.
• If more than one software product is used, information between them must be digitally linked (e.g., via API, CSV transfer), not manually re-typed.

Automatic MTD Sign-Up

HMRC now automatically enrolls new VAT registrations into MTD unless the business qualifies for an exemption or has applied for one

Digital Links

A “digital link” means data moves electronically between software programs without manual transfer like copy-paste — this is a strict requirement designed to ensure accuracy and traceability of tax records.

Why Bookkeeping Matters Under MTD

Digital record-keeping isn’t just a bureaucratic requirement — it supports accurate VAT calculation and filing:

• Proper bookkeeping ensures your VAT figures are correct (output vs. input VAT).
• Digital records feed directly into the return software, aligning your records with what is submitted to HMRC.
• Digital records help avoid errors and potential penalties.

Records must include:

• Business designatory data (name, address, VAT number),
• Dates and values of supplies made and received, and
• VAT charged and paid for each supply included on the VAT return.

Note: While invoices and supporting documents must be kept, these do not have to be stored digitally as long as the required records are digitally captured in your bookkeeping system.

MTD Beyond VAT: What’s Changing With Self-Assessment

Making Tax Digital is also being extended beyond VAT into Income Tax Self-Assessment (for sole traders, landlords, and others) — not just VAT reporting. According to HMRC:

• The original MTD vision was set out as early as 2015, with VAT as the first mandatory stage.
• MTD for Self-Assessment is planned to require digital tax records and quarterly updates, followed by an end-of-year declaration.

This shift means that self-employed people will eventually need to keep digital records and report income and expenses in a more frequent digital format, much like how VAT reporting works.

If you are looking for an accountant to help you with your queries related to your business accounts, Call at 020 35765107 or send a message to book a free consultation. Learn more about our online accounting services and pricing.

Note: It must be noted that the information provided in all our blogs are solely for the awareness purposes and are designed with the intention to create an ease for the reader to understand the rules and their importance. However, it should never be considered as an ultimate replication of rules. RezEx Accountants (RezEx Ltd) does not own any responsibility for any unpleasant event that may arise due to misinterpretation of a specific part or whole of the information.