VAT returns for small businesses

Who has to be registered

A business has to register for VAT once its taxable turnover goes over the registration threshold, which is £90,000 in 2026-27. Taxable turnover is everything you sell that is not exempt from VAT, so zero-rated sales count towards it. There are two tests: a look back over the previous 12 months at the end of each month, and a look forward at the next 30 days on their own.

A business below the threshold can register voluntarily, and one whose taxable turnover falls below the deregistration threshold (£88,000 in 2026-27) can ask HMRC to cancel its registration. Our article on VAT registration covers the tests and the effective date in detail.

Return periods and the deadline

Most businesses send a VAT return every three months, on periods HMRC confirms when it registers them. For each period, the return and any VAT owed must both reach HMRC within one calendar month and seven days of the period end. A quarter ending on 30 June, for example, is due by 7 August.

The deadline does not move for weekends or bank holidays, and a return is still required for a period with nothing to pay or reclaim.

Making Tax Digital for VAT

Every VAT-registered business, whatever its turnover, has had to follow Making Tax Digital rules since April 2022. In practice:

• the VAT records are kept digitally, in software that can prepare the return from them;
• data moving between programs, such as from a spreadsheet into bridging software, travels by a digital link (HMRC does not treat copying and pasting as one);
• the return goes to HMRC from that software, not through a web form.

Exemptions are narrow: where age, disability or location makes digital records impractical, on religious grounds, or during insolvency. Extra cost or effort alone is not enough.

The VAT accounting schemes

Three HMRC schemes change how or when VAT is worked out. Each has limits for joining and leaving.

Before choosing, note that a Flat Rate business spending very little on goods (less than 2% of turnover, or under £1,000 a year) pays a flat 16.5% as a limited cost business. Cash Accounting cannot be combined with the Flat Rate Scheme. And under Annual Accounting a repayment comes only once a year.

Penalty points and late payment

For VAT periods starting on or after 1 January 2023, HMRC uses a points-based system.

Late returns. Each late return earns one point, nil returns included. The threshold is 2 points for annual filers, 4 for quarterly and 5 for monthly. Reaching it brings a £200 penalty, with another £200 for each further late return. Points clear only after a run of on-time returns (12 months for quarterly filers) and once every outstanding return from the previous 24 months is in.

Late payment. VAT paid within 15 days of the deadline attracts no penalty, though interest still runs. From day 16 a first penalty of 3% of the VAT unpaid at day 15 applies, plus 3% of anything still unpaid at day 30 once the debt is 31 days old. From day 31 a second penalty accrues daily at the equivalent of 10% a year. Interest is charged at the Bank of England base rate plus 4%.

Linx Tax Defence publishes guides to late filing penalties and penalty points and to Time to Pay arrangements for businesses that cannot pay on time.

Two areas that need extra care

Partial exemption. A business that makes both taxable and exempt supplies generally cannot recover VAT on costs linked to its exempt supplies. The exception is where that VAT is small enough to be de minimis: no more than £625 a month on average and no more than half of all the VAT on its costs for the period. The position is reviewed again at the year end.

The construction reverse charge. Since 1 March 2021, when a VAT-registered business buys standard or reduced-rated building services and the payment is reported under the Construction Industry Scheme, the customer accounts for the VAT instead of the supplier. It does not apply where the customer is an end user or intermediary supplier and has told the supplier so in writing.

What we do

• Prepare each return from your bookkeeping and reconcile the VAT figures to your ledger before filing.
• Review the VAT treatment of anything unusual in the period, such as an asset purchase, a sale outside the UK or a new income stream.
• File the return through Making Tax Digital compatible software once you have approved it, and confirm the amount and date to pay.
• Work through whether a VAT accounting scheme fits your figures, and deal with joining or leaving one.
• Handle registration, changes to your VAT details and cancellation.
• Correct earlier errors where the rules allow them to go on the next return.

Where the records and the return are prepared together, the VAT work usually sits alongside our bookkeeping service. If HMRC opens a check into your VAT, our specialist practice, Linx Tax Defence, handles VAT investigations.

What we need from you

• Access to your bookkeeping software, or your sales and purchase invoices, receipts and bank statements for the period.
• Details of anything outside normal trading: assets bought or sold, goods imported or exported, grants received, or income that may be exempt.
• Authority for us to act as your agent with HMRC for VAT.
• Your approval of each return before it is filed.
• The records in good time before the deadline, so questions can be settled before anything is sent.