How do VAT returns work? It’s one of those questions that feels like it should have a simple answer, but once you’re actually sat in front of your accounting software with a deadline looming, it stops feeling simple very quickly.

What actually goes into a VAT return

A VAT return is essentially a summary of your business’s VAT activity over a set period, usually a quarter. According to HMRC, a VAT return must include your total sales and purchases, the VAT you owe, the VAT you can reclaim, and any VAT HMRC owes you. You’re telling HMRC: here’s what I collected on your behalf, and here’s what I paid out.

The difference between those two figures is what you either pay over or reclaim. If you’ve charged more VAT than you’ve spent, you pay the difference to HMRC. If you’ve spent more than you’ve charged, for example if you’ve had a big equipment purchase, HMRC pays you back.

Making Tax Digital and what it means for your VAT return

Making Tax Digital for VAT requires all VAT-registered businesses to keep records digitally and file VAT returns using compatible software. That software has to be able to keep digital records, prepare your return, and talk directly to HMRC via their API. You can’t just type figures into the HMRC portal anymore.

In practice this means using something like QuickBooks, FreeAgent, Xero or Sage. Most businesses are already there. But if you’re still keeping records on spreadsheets or in a notebook and manually entering numbers, that’s where things get complicated and that’s often where mistakes creep in.

Where people go wrong with VAT returns

The most common problem I see is a mismatch between what’s in the accounting software and what’s actually happened in the bank. Transactions get miscategorised, VAT is applied at the wrong rate, or items that shouldn’t have VAT on them do, and vice versa. It’s not that people are careless, it’s that VAT has a lot of rules that aren’t obvious until you run into them.

One that catches people out regularly is import VAT. Import VAT can be accounted for using postponed VAT accounting on your VAT return, but you have to know to look for your monthly import adjustment statements and include them correctly. Miss that, and your return is wrong before you’ve even started.

When does it make sense to hand this over to someone else?

There’s no rule that says you have to do your own VAT return. Plenty of business owners do, and they do it fine. But there’s usually a point where the time it costs you outweighs what you’d pay to have it handled properly. If you’re spending a full day every quarter on reconciliation, chasing figures and second-guessing yourself, that’s time you’re not billing.

It also makes sense to get help if your transactions are getting more varied, if you’re dealing with imports or exports, if you’ve had a penalty, or if you’ve just never been quite sure your returns have been right. Having someone check the last return before they take over going forward isn’t unusual at all. I’ve done it plenty of times.