VAT Returns, Accounting, Errors, and Penalties

What are the two main types of tax a VAT-registered business's accounting system should record?

Input tax on purchases and expenses, and output tax on sales.

Which accounting record provides the data for the VAT Return by recording all items of input and output tax?

The VAT control account (or VAT Account).

What accounting record, compiled from sales invoices, lists sales made on credit and typically has a VAT analysis column?

The sales daybook.

When a business does not use the cash accounting scheme, why is VAT on receipts from credit customers in the cash book not normally analysed?

Because the VAT has already been dealt with in the sales daybook when the invoice was issued.

What is the central record for any VAT-registered business's bookkeeping system?

The VAT Control account, or VAT account.

In a VAT control account, what does the debit side represent?

The input tax.

In a VAT control account, what does the credit side represent?

The output tax.

From which accounting record is the total input VAT on credit purchases taken for the VAT control account?

The Purchases Daybook.

If a business discovers a net error on a previous VAT return where HMRC owes the business money, on which side of the VAT Account would the correction be entered?

On the debit (input) side of the VAT Account.

How is the total VAT due to HMRC calculated from the VAT control account?

By deducting the total of the input VAT side (debit) from the total of the output VAT side (credit).

Under what condition might the total input VAT on the debit side of a VAT account be greater than the total output VAT on the credit side?

This can happen for a business that sells zero-rated goods, as it reclaims input VAT but charges no output VAT.

Provided an error is not deliberate and relates to an accounting period less than four years old, under what threshold can it be corrected on the current VAT Return?

When the net value of all errors is below the reporting threshold.

What is the standard error reporting threshold for correcting errors on a current VAT return?

The net value of errors is £10,000 or less.

For net errors between £10,000 and £50,000, what is the alternative error reporting threshold condition?

The net error must be up to 1% of the total value of sales and other outputs (Box 6 figure) for the period in which the error was discovered.

If an error on a previous VAT return means more tax is due to HMRC and it is below the reporting threshold, how is this adjusted on the current VAT Return?

The amount is added to the output VAT figure in Box 1.

If an error on a previous VAT return means tax is due back to the business and it is below the reporting threshold, how is this adjusted on the current VAT Return?

The amount is added to the VAT reclaimed on purchases in Box 4.

How must a business report a deliberate VAT error or one that is over the reporting threshold?

It must be declared separately, in writing, to HMRC as a 'voluntary disclosure

Which box on the VAT Return includes the VAT due on all goods and services supplied in the period (output tax)?

Box 1.

Which box on the VAT Return includes the deductible VAT on business purchases (input tax)?

box 4

What does Box 3 of the VAT Return represent?

The total VAT due, which is the sum of boxes 1 and 2.

What does Box 5 of the VAT Return represent?

The net VAT to pay to, or reclaim from, HMRC (the difference between Box 3 and Box 4).

Which box on the VAT Return shows the total value of sales and all other outputs excluding any VAT?

box 6

Which box on the VAT Return shows the total value of purchases and all other inputs excluding any VAT?

box 7

In which box on the VAT Return should VAT relating to bad debt relief be included?

box 4

A bad debt must be more than _____ overdue and less than four years and six months overdue to qualify for bad debt relief.

six months

What must a business do with a debt in its accounts before it can claim bad debt relief?

The debt must have been written off in the business's VAT account and transferred to a separate bad debt account.

An invoice for £867 including standard rate VAT (20%) has been written off. How much bad debt relief can be claimed?

£144.50 (calculated as £867 × 1/6).

Why can bad debt relief not be reclaimed when a business uses the cash accounting scheme?

Because under the cash accounting scheme, VAT is not paid to HMRC until after the customer has paid the business.

MTD for VAT requires businesses to use compatible accounting software for keeping records, preparing VAT returns, and what other key function?

Communicating with HMRC digitally via HMRC's Application Programming Interface (API) platform.

What is the standard deadline for filing a quarterly VAT Return electronically?

One month and seven days after the end of the VAT period.

A business has a quarterly VAT period ending 30th April. By what date must it submit its VAT Return?

By 7th June.

If a business pays its VAT by direct debit, when will HMRC automatically collect the payment?

Three bank working days after the VAT Return submission deadline.

What is a potential reason for the VAT Return not reconciling with the accounting records when moving from a manual to a computerised system?

Data has been transferred incorrectly to the computerised accounting system.

What is the penalty system for submitting a VAT return late?

A points-based system.

What is the financial penalty for a business that reaches its late submission penalty point threshold?

A £200 penalty.

What is the late submission penalty point threshold for a business that submits VAT returns quarterly?What is the late submission penalty point threshold for a business that submits VAT returns quarterly?

4 points

What is the late submission penalty point threshold for a business that submits VAT returns annually?

2 points

If a business is at its penalty point threshold, what happens if it submits another VAT return late?

It will receive another £200 penalty.

Once a business has reached its late submission penalty threshold, what two conditions must it meet for the points to be reset to zero?

Condition A: complete a period of compliance, and Condition B: submit all outstanding returns for the previous 24 months

For a business submitting quarterly VAT returns, what is the length of the 'period of compliance' required to reset penalty points?

12 months.

For a business submitting annual VAT returns, what is the length of the 'period of compliance' required to reset penalty points?

24 months.

A business gets a first late payment penalty if its payment is _____ or more days overdue.

Explain

The first late payment penalty increases and a second late payment penalty is added once the payment becomes _____ or more days overdue

31

What is the penalty rate for a VAT payment that is between 16 and 30 days overdue?

2% on the VAT outstanding at day 15.

What are the two components of the penalty for a VAT payment that is 31 days or more overdue?

A first penalty of 2% on the amount outstanding at day 15, plus a second penalty of 2% on the amount outstanding at day 30.

In addition to penalties, what does HMRC charge from the first day a VAT payment is overdue until it is paid in full?

Late payment interest.

If HMRC owes a business repayment interest, at what rate is it calculated?

The Bank of England base rate minus 1%, with a minimum rate of 0.5%.

What document will HMRC issue to a business that fails to submit its VAT Return on time?

A VAT notice of assessment of tax.

If a business does not inform HMRC that an assessment of tax is too low within 30 days, what penalty can HMRC charge?

A penalty that is 30% of the assessment amount.

At what rate does HMRC charge late payment interest on overdue VAT?

The Bank of England base rate plus 2.5%.

For how long must a business keep its accounting records for potential inspection by HMRC?

For at least six years.

If a business operates the _____ accounting scheme for VAT, the VAT on receipts from credit customers will need to be identified and posted from the cash book.

cash

On a VAT Return, the total value of sales in Box 6 should be adjusted for any _____ issued by the business.

credit notes

The VAT on goods taken for _____ use must be included in Box 1 of the VAT return, even if the goods are not paid for.

private

A newly registered business will not be penalised if its _____ Return is late.

A newly registered business will not be penalised if its _____ Return is late.

See answer

first

If the deadline for a VAT return was 7th May 2024, when would a single penalty point for late submission automatically expire, assuming the threshold is not reached?

On 31st May 2026 (24 months after the end of the month the deadline was in).

Which two specific VAT payment types are explicitly excluded from late payment penalties?

VAT payments on account and instalments for the VAT Annual Accounting Scheme.

A VAT-registered business, submitting quarterly, wrote off an invoice of £867 on a debt due for payment on 12th February 2025. What is the earliest date from which bad debt relief can be claimed?

From 12th August 2025 (six months after the due date)

A business must continue to keep digital records and submit returns digitally under MTD even if its turnover falls below the VAT threshold, unless it _____ from VAT.

deregisters

If accounting software is incorrectly set up for the normal VAT scheme when the business uses the _____ scheme, it will calculate the wrong amount owed to HMRC.

flat rate