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.

VAT schemes and settings

Setting up your VAT Scheme

You select your VAT Scheme when you sign up and enter your basic company information.

The following VAT Schemes are available:

  • Cash accounting
  • Standard
  • Flat rate cash based
  • Flat rate invoice based
If your company isn't VAT registered, select Not Registered.

VAT settings

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

VAT scheme If your VAT scheme is flat rate cash or invoice based, you should also enter the flat rate percentage.
Submission Frequency If you’re VAT registered, you need to submit a VAT Return at regular intervals, usually every 3 months. You can choose monthly, quarterly or annually depending on your registration with HMRC.
VAT Number Your registered VAT number.
HMRC user ID All VAT returns must be sent online. As part of the VAT registration process, a VAT online account or Government Gateway account is created. The ID is given to you when you register with HMRC to submit your forms online. If you haven’t already registered, please visit GOV.UK and register your details.

VAT rates

Depending on what you buy or sell, there are several different VAT rates which might apply. For example, the standard rate of 20% or a zero VAT rate. Some transactions are outside the scope of VAT altogether.

Changing 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.

Working with VAT

Which VAT rates to use

There’s a range of different rates to choose from. To help you choose the correct VAT rates when you record your sales and purchases, we’ve put together a VAT rate guide.

Trading within the EU

If you deal with VAT registered customers and suppliers in the EU, you must enter a valid VAT number. You can use the EC Sales Analysis report to help you complete your EC Sales List (ESL) for HMRC.

Trading outside the EU

If you purchase goods from a country outside the EU, you may need to pay import VAT and duty. This usually applies if the goods you purchased are subject to VAT in this country.

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.

Sage automatically calculates 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.

Recording 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