VAT repayments: how it works ?

How are VAT repayments calculated?

All companies that are registered for value-added tax (VAT) in the UK are obliged to charge VAT. This may be at the standard rate (20%), a reduced rate (5%) or a zero rate (0%), depending on the type of good or service being sold. HMRC determines which rate of VAT should be applied to different categories of items. Specific rules apply to the VAT treatment when clients pay a deposit for the later supply of goods or services, in which case the date the VAT invoice is issued is key.

Once a quarter, on a date determined by the date of first registration for VAT, the company has to submit a document known as a VAT return. In this document, the company reports the total amount of VAT it has charged and collected from its customers, an amount known as “input VAT”.

The VAT return also requires information on VAT that has been paid out by the company on eligible business expenses. This includes VAT on essential business supplies, fuel, subsistence costs etc, and must be backed up by a VAT invoice issued by the supplier. This amount is known as “output VAT”.

The difference between the input VAT figure and the output VAT figure determines whether or not the company has to settle their VAT bill or whether it can claim a refund.

Let’s look at a couple of examples

Tom is self-employed and makes his living selling cupcakes. He charges £1,400 VAT to his customers over the relevant period. Over the same period, he also buys cake-making supplies and other expenses which total £2,200 VAT. In Box 3 of his VAT return, Tom records his input VAT, in this case, £1,400. In Box 4 of his VAT return, he records his output VAT of £2,200. Because the amount in Box 3 is lower than the figure in Box 4, Tom is eligible for a VAT refund equivalent to the difference between the two, in this case, £800.

Meanwhile, Laura runs a business consultancy and charges her clients £3,500 VAT over the quarter. At the same time, she only pays out £1,300 in VAT for expenses and office supplies. When she completes her VAT return, her output VAT is higher than her input VAT and she owes HMRC a total of £2,300. 

It is important to remember that the deadline for paying a VAT bill is the same as the deadline for filing the return, so you should make sure to build this into your timetable! 

Occasionally, HMRC may introduce a VAT deferral scheme. This was notably the case during the COVID-19 pandemic when businesses were allowed to defer their VAT payments. 

Furthermore, when goods and services that attract VAT are being supplied between two countries within the EU, a reverse charge mechanism has been introduced to simplify VAT reporting and collection.

How long does it take?

When a VAT repayment is due, it is usually made promptly. In most cases, within 30 days of HMRC receiving the VAT return. Repayments are made directly into a company bank account if the company has provided its banking details to the HMRC. If not, HMRC will send the company a cheque, which is referred to as a “payable order”.

Companies that have registered for the government VAT programme “Making Tax Digital” can track their VAT repayments online.

If payments take longer than 30 days, you may be eligible for compensation of up to £50, known as the “repayment supplement”. If you think you may be eligible for this, you should contact HMRC.

Fraud

All VAT-registered companies are obliged to charge the correct amount of VAT, pay VAT on relevant supplies, report these figures to the HMRC through their VAT returns and keep comprehensive VAT records.

Failure to fulfil any of these responsibilities and actions that may mislead HMRC are considered to be VAT fraud and can result in serious consequences for a business.

VAT fraud is considered by HMRC to be a form of tax evasion and is a criminal offence. The penalties for being found guilty of VAT fraud range from financial penalties to prison sentences, depending on the severity of the offence. A business may also be found guilty of indirect VAT fraud if they enable VAT fraud by a third party, such as an accountant.

Conclusion

Charging, collecting and reporting VAT needn’t be a headache. With Mooncard corporate cards, it is easy to keep track of input and output VAT and to keep accurate records.
Find out more with a free demonstration today!