How to Complete a VAT Return: Step by Step

What Is a VAT Return?

A VAT return is a summary of the VAT you've charged on sales and the VAT you've paid on purchases during a VAT period (usually a quarter). The difference between the two determines whether you owe HMRC money or they owe you a refund.

Since April 2022, all VAT-registered businesses must submit their returns through Making Tax Digital (MTD) compatible software. Paper returns and manual submission through the HMRC portal are no longer accepted for most businesses.

The Nine Boxes

Every VAT return has nine boxes. Understanding what goes in each box is essential for completing your return correctly.

Box 1: VAT Due on Sales

The total VAT you've charged on your sales during the period. If you sell £50,000 of standard-rated goods and services, Box 1 is £10,000 (20% of £50,000).

This includes VAT on:

• Sales to customers
• Sales of business assets
• Supplies to connected parties
• Reverse charge amounts you must account for

Box 2: VAT Due on Acquisitions from EU Countries

VAT due on goods acquired from EU member states. Since Brexit, this box is used less frequently, but it still applies for certain Northern Ireland transactions under the Windsor Framework.

Box 3: Total VAT Due

Simply the sum of Box 1 and Box 2. Your software calculates this automatically.

Box 4: VAT Reclaimed on Purchases

The total VAT you can reclaim on business purchases during the period. This is your input tax — the VAT charged to you by your suppliers on goods and services you've bought for business purposes.

You can only reclaim VAT if:

• You have a valid VAT invoice
• The purchase is for business purposes
• The goods or services are used for making taxable supplies

Box 5: Net VAT to Pay or Reclaim

Box 3 minus Box 4. If the result is positive, you owe HMRC. If negative, HMRC owes you a refund.

Box 6: Total Value of Sales (Excluding VAT)

The total value of all your sales and outputs, excluding VAT. This includes standard-rated, zero-rated, and exempt supplies.

Box 7: Total Value of Purchases (Excluding VAT)

The total value of all your purchases and inputs, excluding VAT. This includes all business purchases, whether or not you can reclaim VAT on them.

Box 8: Total Value of Supplies to EU Countries

The value of goods supplied to EU countries, excluding VAT. Post-Brexit, this primarily applies to Northern Ireland sales to EU countries.

Box 9: Total Value of Acquisitions from EU Countries

The value of goods acquired from EU countries, excluding VAT. Again, primarily relevant for Northern Ireland post-Brexit.

Step-by-Step Process

Step 1: Check Your Records Are Complete

Before preparing your return, ensure all transactions for the period are recorded:

• All sales invoices issued during the period
• All purchase invoices received during the period
• All bank transactions reconciled
• All receipts captured and categorised

With Accounted, Penny automatically pulls in your bank transactions and matches them with receipts, so your records are always up to date.

Step 2: Review Your Sales

Check that all sales invoices have the correct VAT rate applied:

• 20% standard rate for most goods and services
• 5% reduced rate for specific items (home energy, children's car seats, etc.)
• 0% zero rate for items like most food, books, children's clothing
• Exempt for items like insurance, education, some financial services

Common errors include applying the wrong rate to zero-rated or exempt supplies.

Step 3: Review Your Purchases

Check that input VAT is only being reclaimed on eligible purchases:

• You have a valid VAT invoice (showing the supplier's VAT number, the VAT amount, etc.)
• The purchase is for business use (or the business proportion of mixed-use items)
• The supply is not blocked from reclaim (e.g., client entertainment, non-qualifying cars)

Step 4: Account for Special Items

Some transactions need special treatment:

• Bad debts: If you've written off a debt that's more than 6 months old and you've already accounted for the VAT, you can reclaim it through Box 4
• Credit notes: Reduce the relevant box for any credit notes issued or received
• Reverse charge transactions: Some supplies require you to account for VAT in both Box 1 and Box 4
• Imports: Post-Brexit, import VAT may be accounted for on your VAT return through postponed VAT accounting

Step 5: Calculate the Figures

Your MTD-compatible software calculates the nine-box figures from your digital records. Review the figures to check they look reasonable:

• Does Box 1 (output VAT) look right given your sales?
• Does Box 4 (input VAT) look right given your purchases?
• Is Box 5 (net VAT) in line with what you'd expect?

A quick sense-check: if your output VAT seems low relative to your sales, you might have miscategorised some sales as zero-rated or exempt. If your input VAT seems high, check for personal expenses accidentally included.

Step 6: Submit Through MTD

Submit your return through your MTD-compatible software. You cannot type the figures directly into an HMRC portal — they must flow from your digital records through the software's MTD connection.

After submission, you'll receive a confirmation from HMRC. Save this for your records.

Step 7: Pay (or Receive Your Refund)

If you owe HMRC (Box 5 is positive), payment is due one calendar month and seven days after the end of the VAT period. For example, a return for the quarter ending 30 June is due by 7 August.

Payment methods include direct debit (recommended — gives you extra time), online banking, BACS, or CHAPS.

If HMRC owes you (Box 5 is negative), the refund is usually processed within 10 working days, though it can take longer, especially if HMRC decides to verify your claim.

Making Tax Digital Requirements

Under MTD for VAT, you must:

1. Keep digital records of all VAT transactions
2. Use MTD-compatible software to submit returns
3. Maintain a digital link between your records and your submission — no manual transposition of figures

Accounted is fully MTD-compatible, maintaining digital records and submitting directly to HMRC's API.

Common Errors to Avoid

Claiming input VAT without a valid invoice. A bank statement or delivery note isn't enough — you need a proper VAT invoice showing the supplier's VAT registration number.

Including exempt income in Box 1. Exempt supplies don't attract VAT. Make sure they're excluded from your VAT calculations (though they should appear in Box 6).

Forgetting about fuel scale charges. If you reclaim VAT on fuel used partly for private motoring, you may need to account for a fuel scale charge.

Missing the deadline. Late submission or late payment triggers penalties under the new points-based system.

Not reconciling before submitting. Always check your figures before hitting submit. An error in your return could trigger an HMRC compliance check.

How Accounted Makes VAT Returns Easy

With Accounted, your VAT return is essentially prepared for you. Penny categorises every transaction with the correct VAT rate, matches receipts to ensure you have valid VAT invoices, and prepares the nine-box figures automatically. When it's time to submit, one click sends your return to HMRC through the MTD API.

Submit your VAT returns with confidence. Start your free trial with Accounted and let Penny handle the VAT.