VAT Overview

If your business is VAT registered, you must submit regular VAT Returns to HMRC. These summarise your sales and purchases for the period and any VAT you need to pay or reclaim. It’s important that your VAT returns are accurate, to ensure that you pay what’s due. Not paying enough VAT can result in penalties.

We’ve gathered together everything you need to help you to make sure that your settings and the transactions you post are correct so that you can submit your VAT returns with confidence.

Set up your VAT schemes

You select your VAT Scheme when you sign up and enter your basic company information. You should do this before you enter any transactions.

The following VAT Schemes are available:

If your company isn't VAT registered, select Not Registered.

Check your VAT settings

To check or enter the following VAT settings, go to Settings, and then click Accounting Dates & VAT:

  • VAT scheme - check you have chosen the correct scheme. If your VAT scheme is flat rate cash or invoice based, you should also enter the flat rate percentage.
  • Submission Frequency - How often you submit a VAT Return to HMRC. Choose from monthly, quarterly or annually depending on your registration with HMRC.
  • VAT Number - Your VAT registration number.
  • HMRC user ID - The ID given to you when you register with HMRC to submit your forms online. Enter this here to submit returns directly from Sage Accounting. As part of the VAT registration process, a VAT online account or Government Gateway account is created. If you haven’t already registered, please visit GOV.UK and register your details.

Change your VAT scheme

There may be a time when you need to change VAT schemes, for example, because you’ve reached a turnover threshold or because a different scheme would be more beneficial to your business.

Which VAT rates to use

Depending on what you buy or sell, there are several different VAT rates which might apply.

To keep things simple, when you enter a transaction there are five VAT rates to choose from. You don’t need to worry about maintaining the rates we do this for you. Simply choose the appropriate VAT rate for your transaction:

  • Standard – for standard rated transactions. (Currently 20%)
  • Lower Rate – for lower rated transactions. (Currently 5%)
  • Zero Rated – for zero-rated transactions – (Currently 0%)
  • Exempt – for transactions exempt from VAT, the net amount still appears on your VAT Return.
  • No VAT – for transactions not involving VAT, these don’t appear on your VAT Return.

To help you choose the correct VAT rates when you record your sales and purchases, check out our VAT rate guide.

You cannot create custom VAT rates (such as the T codes in Sage 50). If you are using a sub-scheme for VAT, where the VAT is calculated differently to the Standard 20%, then you need to select the Standard rate then amend the VAT value on the transaction to the correct amount.

Trading outside the UK

If you buy and sell goods and services to customers and suppliers outside the UK, VAT may be charge differently depending on what you are buying or selling, and whether your customer or supplier is registered for tax.

If you sell goods and services to customers outside the UK, you must enter an valid VAT number on their contact record. When entering transactions, choose whether each line on the invoice is for goods or services and we'll apply the VAT correctly. For more information see VAT on overseas sales

If you purchase goods from a country outside the UK, you may need to pay import VAT and duty. This usually applies if the goods you purchased are subject to VAT in this country. How the VAT is applied to your invoices depends on how you want deal with the import VAT and duty. For more information see Import VAT and duty

To improve business cash flow, you can choose use postponed accounting to account for the VAT on these imports. See Postponed accounting for Great Britain businesses

VAT surcharges

Sometimes HMRC may impose a VAT surcharge. For example, if you don’t send the VAT Return and the payment due by the due date or if the VAT return is incomplete or incorrect. In these cases, HMRC has the power to impose a fine or a recalculation of the payment required. This is known as a VAT surcharge.

The VAT Return

Create and submit a VAT Return

You need to create and submit a return to HMRC once a month, quarterly or annually.

We automatically calculate the VAT due depending on your VAT scheme and the rates you choose when entering your transactions. You can find out more about how each value on the return calculates.

When you make online submissions to HMRC, if the submission fails you may receive an error.

Record VAT payments and refunds

Once you’ve successfully created and submitted your VAT Return, to clear your VAT liability you need to record the payment of VAT to HMRC or, if applicable, the amount of VAT you’ve reclaimed.

Get the Sage Small business guide to VAT