Calculate a VAT Return

Go on, admit it, you are starting to feel like a tax collector! Having got the invoices in a good state, if you have invoices to cover your purchases, then the VAT return ought to be simple. At the end of the quarter (as per the VAT calendar), you have some tax points ie an event like sending a product to a customer, for which HMRC expect you to collect and pay VAT. The HMRC calendar explains the flow here and the possible problem ie that VAT due to HMRC is not triggered by a customer paying you.

Tax points are created when you either complete a service, are paid or send a product to a customer.

The VAT due on all tax points needs to be declared in the VAT return at the end of the quarter containing the tax point. The amount of VAT due is

Output VAT minus Input VAT

where

  • Output VAT is VAT charged on invoices sent to your customers
  • Input VAT is VAT charged on invoices paid by your business


In the consulting example in Adding VAT to invoices the service was completed creating the tax point. The invoice was sent.

The output VAT is £240 as per the invoice.

There will be input VAT on the expenses. The invoice tells us that we spent £200 on expenses ie £166 net price plus £34 VAT adding up to the gross price of £200. That information will be found on the invoices paid. This £34 is input VAT.

For the sake of the example, assume the business also bought a cheap printer for £48. This has not been charged as an expense. The invoice on that printer reveals that the business paid £40 net plus £8 VAT. That £8 is additional input VAT. This takes the total input VAT for the quarter to £42.

The VAT return (see below) will declare these figures revealing a VAT bill, payable by the business of output VAT (£240) - input VAT (£34 + £8) ie £198.

VAT return example

 If you want to check this, remember that you do not make a profit on VAT. You are just collecting it for HMRC. The VAT liable ought to ensure that you pay the difference between what VAT you charge for and the VAT you have paid to a supplier. In the above example this does balance suggesting we are on the right track.


For the chair example, the retailers VAT:

  • Output VAT is £200 (as per the customer invoice)
  • Input VAT is £100 (as per the invoice from the chair maker, see VAT Chain example)
  • VAT liability is £100 (£200 - £100)


To check this example, lets consider what HMRC expect:

  • Total value created by the VAT chain is £1000 ie the net price paid by the customer.
  • Therefore HMRC expect to collect 20% of that (£200) across the VAT chain.
  • The retailer pays £100, the furniture manufacturer pays £60 and the forrester £40. Therefore, a total of £200 has been collected.
  • The expected VAT has been raised.


This example is also described in the following diagram

VAT Chain example 2

While this example does not include any none customer goods (like the printer) the logic remains solid as the printer is part of another VAT chain! Let’s not go there just now.

This hopefully explains what an SME needs to understand to deal with VAT returns. However, taxation is never actually that simple. The next layer of complexity covers different VAT rates, whether to register or not, bad debt. There is also a useful simplification called cash accounting which can be helpful.