Sometimes, VAT compliance can feel like walking a tightrope for business owners in the UK. With constant rule updates and specific reporting requirements, the threat of a misstep, and a potential penalty to go with it, looms large.

But, fortunately, there’s plenty you can do to keep your balance and ensure you’re fully compliant – protecting your business and bringing peace of mind. So, in this article, we’ll guide you through the essentials of VAT compliance.

We’ll start with the requirements in the UK, and then explore the EU regulations for those who trade internationally. We’ll also discuss the penalties for non-compliance, give you an insight into HRMC’s compliance checks, and, most importantly, provide you with a practical checklist to take away.

Our team of VAT specialists includes ex-HMRC inspectors, and we have extensive experience in handling VAT matters both locally and internationally. With this guide, we’ll help you avoid costly mistakes and manage your compliance with confidence.

Requirements for VAT compliance in the UK

In this section, we’ll look at the requirements for VAT when providing goods and services within the UK.

VAT Registration

When it comes to compliance, the first issue to solve is whether you need to register or not. By law, any business with a taxable turnover over £90,000 in the last 12 months must register for VAT. The registration process can be done online via the Government Gateway portal.

In terms of compliance, the question of registration is simple: you either meet the requirement or you don’t. If you do, you must register. If you don’t, you don’t have to register, but you can choose to. We’ve written an explainer on this previously, so if you’d like to learn more about weighing up the pros and cons of registration then have a read: Do I need to register for VAT?

Charging VAT

Once registered, you must begin charging VAT on the goods and services you provide in the UK:

1. Your invoices must include your VAT number (which will be provided to you by HMRC) and a breakdown of the VAT applied.
2. You must charge the correct VAT rate (this is your output tax). There are three rates in the UK (standard at 20%, reduced at 5%, and zero at 0%), which depend on the goods or services provided.

Most goods and services are charged at the standard rate (20%), but we highly recommend checking HMRC’s guidance to ensure you’re charging correctly – misapplying rates can lead to major problems further down the line.

In addition to the three rates, there are also goods and services which are exempt or outside the scope of VAT. These types of supplies can impact your ability to recover input tax (i.e. the VAT you pay on other goods and services). This is where things can get a little tricky, so we suggest speaking to a professional if this applies to you.

Maintain VAT Records

One of your obligations as a VAT-registered business is to store and maintain accurate records, including invoices and receipts. HMRC has a full list of records to keep, which you can refer to so we won’t reprint here. Here’s the important part though: you must keep detailed records for at least six years, and they must be accessible in case of an HMRC inspection.

Submit VAT Returns

The final aspect of VAT compliance in the UK is submitting your returns. In short, you need to pay the VAT you have charged (see above) less the VAT incurred on your business costs, your input tax to HMRC.

Since the implementation of Making Tax Digital (MTD), this has become much easier. You use MTD-compatible software to store digital records and submit your VAT return, which is prepared automatically using details from the invoices you’ve sent and received during the last “VAT accounting period”.

Late returns or payments can result in penalties, so here are the deadlines you need to remember:

• Most businesses operate on quarterly VAT accounting periods, meaning they submit a VAT return every three months. The deadline for both submitting the VAT return and ensuring payment reaches HMRC is one calendar month and seven days after the end of the accounting period. For example, for a VAT period ending on 31 March, the return and payment are due by 7 May.
• If your business is part of the Annual Accounting Scheme then you submit one VAT return per year, two months after the end of your 12-month accounting period. Throughout the year, you’ll make advance payments towards your VAT bill, either monthly or quarterly, with a final balancing payment (or refund) upon submission of the annual return.

Requirements for VAT compliance in the EU

If your business trades with the EU, there are a variety of VAT compliance obligations to consider – especially post-Brexit. We’ll take a look here at the main concerns for:

1. UK businesses providing goods and services to the EU.
2. UK businesses receiving goods and services from the EU.

Providing goods and services to the EU

Following Brexit, UK businesses are now considered “non-EU suppliers”. But what does this mean for your business? Generally, for B2B goods and services, it means you do not charge VAT at the point of sale to EU customers.

Instead, the responsibility shifts to the customer. For example, with goods, the customer is liable to pay import VAT when the goods enter the EU. For services, the “reverse charge” mechanism applies, where the customer accounts for VAT in their own country.

If you sell directly to consumers (B2C), it’s a bit more complicated. We’ve discussed the treatment of B2C goods previously so check out our advice here: Selling goods to consumers in the EU (B2C) from 1 July 2021.

For B2C services supplied to the EU, since Brexit, this is now outside the scope of UK VAT and VAT need not be charged on most B2C services but there may be a requirement to register for VAT in the EU. However, there are special cases, such as the supply of digital services to non-business customers in the EU, where VAT is due in the customer’s resident state.

All in all, if you’re providing goods and services to the EU, and especially if they’re supplied B2C, we recommend speaking to an adviser to check the VAT regulations.

Receiving goods and services from the EU

If your business receives goods from the EU, these are treated as imports. Therefore, import VAT and, potentially, customs duties will apply. However, as a VAT-registered business, you may be able to use Postponed VAT Accounting (PVA). This allows you to both pay and reclaim your import VAT on your next VAT return as a reverse charge instead of paying it immediately at the border, helping ease cash flow.

If you receive services from EU suppliers, you apply the reverse charge mechanism. Under this rule, the UK recipient accounts for VAT as both the supplier and customer, effectively cancelling out any impact.

Key compliance tips for VAT in the EU

• Check VAT registration requirements in EU countries: Depending on the nature of your trade with the EU, you may be required to register for VAT with the relevant tax authorities in an EU member state – particularly if you sell directly to EU consumers (B2C).
• Use the IOSS and OSS schemes where relevant: These schemes simplify VAT collection and reporting but require registration, so consider using them if you frequently sell B2C goods or digital services to the EU.
• Maintain clear records of cross-border transactions: Accurate record-keeping is hugely important in the event of a VAT compliance check.

Penalties for non-compliance

VAT is a complex area of law and it’s not uncommon for things to go wrong. But, regardless of whether it was a mistake or an intentional misstep, HMRC has a range of penalties for different scenarios:

• Late submissions: If you submit your VAT return late, you receive a penalty point. Accumulating a set number of points results in a £200 fixed penalty. If you report quarterly, reaching four points triggers the penalty. If you report annually, it’s two points.
• Late payments: Late payment penalties are calculated based on how overdue the payment is and are interest based.
• Inaccurate returns: HMRC applies penalties based on the nature of the error in your VAT return, whether it was careless or deliberate. The rate of the penalty can be 0% – 100% of the tax due.
• Penalties for non-registration or late registration: If your business’s taxable turnover exceeds the £90,000 threshold and you fail to register for VAT, HMRC may charge a penalty based on the amount of VAT owed from the point registration was required. Penalty rates can be up to 15% of the VAT due.

You can minimise the risk of penalties, or reduce their impact, by following our advice below:

• Set up reminders for submission and payment deadlines.
• Review VAT returns carefully to ensure everything has been accounted for correctly.
• Ensure MTD compliance by using approved software for record-keeping and submissions.
• Disclose errors voluntarily if they’re identified after submission. Voluntary disclosures can lead to reduced penalties, as they show an intent to comply.
• If cash flow issues are a problem, consider setting up a Time to Pay arrangement with HMRC, which allows you to spread your VAT payments over an agreed period and can prevent penalties.

HMRC VAT compliance checks

Worried about an HMRC compliance check? That’s normal. It can be a stressful period, with your financial records examined and probed. Keep in mind that HMRC is simply trying to ensure businesses are meeting their VAT obligations. If you’ve done everything correctly, you should have no problems.

These checks can range from a simple request for information to a more comprehensive audit. Typically, HMRC will review your VAT records to confirm that:

• VAT has been correctly calculated and charged on sales.
• VAT claimed on purchases is accurate and valid.
• Returns submitted align with financial records and invoices.

Checks can be completely random, so don’t fear if you’ve been chosen. However, you are more likely to be checked if you have submitted a large or unexpected repayment return, have inconsistent reporting (e.g. large fluctuations in declared VAT), repeatedly late or missed returns, frequent corrections or significant errors in previously submitted returns, or you’re part of a high-risk sector (e.g. cash-heavy businesses or exporters).

Straightforward cases can usually be resolved within a few weeks, but if your situation is more complex, it may take a few months.

This is where a solid VAT compliance process really pays off, for example with accurate, detailed record-keeping. That way, you can help HMRC easily access all the information they request, and show you’ve made an effort to comply.

VAT compliance checklist

Now, it’s time to start turning the advice in this article into a more practical set of takeaways for your business.

So, we’ve created the checklist below. However, we should stress that this is only for getting the basics of VAT compliance in place. It’s a starting point.

Summary

VAT compliance may seem challenging, but with the right knowledge and processes in place, it becomes much more manageable. Hopefully, with this guide and checklist to hand, that’s exactly what you’ll find too.

But if you need further support, then please don’t hesitate to get in touch with our team. We’ve worked with thousands of businesses – big and small, domestic and international – to help resolve VAT issues and pass HMRC investigations.

Submit a contact form today and one of our team will be in touch.