How to prepare for a VAT return

As our clients will tell you, a VAT deadline has a habit of arriving when you are busiest! One minute you are quoting for work, chasing a customer payment or trying to get through the week. The next you are looking for receipts, wondering whether every invoice has been entered and worrying about the box 5 figure on your VAT return.

Knowing how to prepare for a VAT return does not mean becoming an expert. It means putting a simple routine around your records, so the numbers are ready when they are needed. With up-to-date bookkeeping, VAT becomes a regular business task rather than a last-minute scramble.

Start with your VAT quarter and filing deadline

Before looking at the figures, be clear about the dates you need to be looking at. Check the start and end dates of the VAT quarter, along with the dates by which the return and payment must reach HMRC. Some businesses pay by DD but in our experience most people like to stay in control of the payment date.

It sounds obvious, but it is easy to include an invoice from the wrong period when books have been left for several months.

If you use the cash accounting scheme, VAT is normally based on when you receive customer payments or pay suppliers. In this case you are concentrating on money in and money out rather than invoice dates.

Using standard VAT accounting, it is generally based on invoice dates.

This difference is really important if you are planning a machinery purchase towards the end of the VAT quarter.

How to prepare for VAT return: get the records in order

Do not start by trying to guess the VAT due from your bank balance. The bank tells you money has moved; it does not tell you an accurate VAT figure.

Work through the period and make sure all sales invoices, supplier bills, expenses and bank transactions have been recorded. If you use accounting software such as Xero or QuickBooks, make time to reconcile the bank balance on the software back to the bank statements.  Software links to the banks can sometimes glitch.

You will usually need four groups of documents to support the return:

• sales invoices and credit notes issued to customers
• purchase invoices, receipts and supplier credit notes
• bank and card statements for every business account
• evidence for any adjustments, such as bad debts, mileage claims or imports

Keep the paperwork behind the numbers. A clear photo or scan of a receipt, attached to the relevant transaction, is far more useful than a fading bundle in the glovebox six months later. If HMRC asks a question, you should be able to see what was claimed and why. This has the added advantage at the year end of allowing your accountant access to the invoices without needing to drop off a folder.

Do not overlook small or irregular costs

The expenses most likely to be missed are not always the large supplier invoices. It is often parking, tools bought on the way to a job, software subscriptions, mobile phone costs, train fares, postage or occasional online purchases. If these were paid from a personal card, they can be particularly easy to forget.

That does not mean every expense has VAT to reclaim. Some suppliers are not VAT registered, some items are exempt or outside the scope of VAT, and the rules for certain costs can be more involved. The point is to record the transaction properly rather than assuming. A receipt without VAT shown should not be treated as though it includes recoverable VAT.

Reconcile the bank before trusting the VAT report

A VAT report is only as good as the bookkeeping prepared. Before reviewing the return, reconcile your bank and card accounts up to the end of the VAT quarter. In plain English, this means checking that the transactions in your bookkeeping match the transactions that actually appeared in the accounts.

This is one of the best checks you can make. It highlights sales that have not been entered, expenses posted twice, payments allocated to the wrong invoice and money transferred between accounts that has been mistaken for income or spending.

Also review unpaid customer invoices and unpaid supplier bills. Their VAT treatment depends on your accounting scheme, but these reports can still reveal gaps.

If you accept card payments through Stripe, Square, PayPal or a similar provider, take extra care. The amount that reaches your bank may be lower than the customer payment because fees have been deducted. Record the full sale and the fee separately. Otherwise, your sales and VAT figures may be understated.

Check the VAT treatment, not just the totals

Once the records are complete, review the VAT report with a questioning eye. Look for anything that seems unusual compared with previous quarters: a sharp fall in sales, a large VAT reclaim, a supplier expense with an unexpectedly high VAT amount, or transactions showing no VAT where you would normally expect it.

A few common areas deserve particular attention. Credit notes should reduce the original sale or purchase correctly. Deposits and advance payments may have a VAT point before the job is complete. Work involving construction, overseas suppliers, imports or services supplied abroad can have different treatment.

VAT has complex rules, and some situations need advice from an accountant or bookkeeper. Asking the question before filing is much easier than correcting a return afterwards.

Review the period end carefully

Run the VAT report for the exact period dates, then compare it with your sales and expense reports. The figures will not always match line for line, especially where there are VAT-exempt items or timing differences, but major differences should have an explanation.

Check that no transactions dated after the period end have slipped in, and that invoices dated within the period have not been left out.

Set money aside before payment day

Submitting a VAT return and paying the VAT bill are separate tasks, but they need planning together. Once you have a sensible estimate of the VAT due, make sure the money is available. Treat VAT collected from customers as money you are holding for HMRC, not extra cash to spend.

For many small businesses, a separate savings pot makes this easier. Move a proportion of each customer payment across during the quarter, then review the balance against your accounting records. The right percentage depends on your sales, expenses and VAT scheme, so it is not a substitute for proper figures. It is simply a useful way to avoid an unpleasant surprise at the deadline.

If the return shows a larger bill than expected, look at why. It may be a busy sales quarter, lower business spending, delayed supplier invoices or an error in the records. Understanding the reason gives you more control than simply paying and hoping next quarter is different.

Build a routine that makes the next return easier

The calmest VAT returns are prepared little and often. Set aside regular time each week or month to raise invoices, enter bills, reconcile the bank and chase missing receipts. For a small business, this may take less time than the frantic clean-up needed at quarter end. We work with our clients each month and have a set checklist to work through.  This routine allows us to carry out the tasks regularly and it means we are not asking for information from ages ago when we ask for invoices etc.

A good routine also gives you better information during the year. You can see who owes you money, whether costs are creeping up and whether there is enough cash to cover upcoming commitments. VAT preparation is not just a compliance job – it is part of keeping control of the business.

If your books are behind, do not feel you have to sort everything alone in one late-night session. Start with the VAT period, gather the available paperwork and work methodically. BW Bookkeeping & Project Solutions can help businesses put a practical bookkeeping routine in place, with clear figures and no jargon.

The goal is not perfection in a spreadsheet. It is being able to look at your records before the deadline and know that they tell the real story of your business. That is a far better place to be than searching through drawers when the VAT return is due tomorrow.

Follow this link to the GOV website for useful information about what to include in your VAT return.

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