Taxes in the UK: The Difference Between VAT and Tax Returns

March 9, 2023

Taxes in the UK: The Difference Between VAT and Tax Returns

Aspiring entrepreneurs should be attentive to the various taxes provided for by the UK tax legislation and the industry in which they work, as some taxes may be “a must”,  while others will not apply to them. 

VAT is an indirect tax – an extra charge on the price of a product. VAT is included in the price of a product or service throughout the entire production and distribution chain, starting from raw materials and ending with the retail sale of the finished goods. 

The VAT returns reflect the amount your business should pay to HMRC or is eligible to recover. In some cases, it may turn out that the VAT you can return will be more than the amount you must pay. This will also be stated in your tax declaration. 

In this article, we will explain how to differentiate between the VAT returns and tax returns that your firm may encounter. We will point out when they affect you and how to pay them to HM Revenue & Customs (HMRC).

What Is a VAT Return? 

A VAT return is the amount of value-added tax determined for companies that produce or sell goods and services that are subject to this tax. HMRC defines a value-added tax return as a form that details how much VAT you have charged your clients and how much you can expect to recover. In other words, a VAT return will indicate the amount owed to HMRC or if you are eligible for a refund. If the amount reclaimable is greater than the VAT due on sales, HMRC will repay the difference. In most cases, VAT returns must be made quarterly. 

Since it is not always necessary to register for VAT, given that there are different tax requirements, you must know how this could impact you. VAT returns are different from the annual tax returns filed by self-employed individuals, sole traders, and small limited company owners. The latter is based on declared profits. 

What Should I Do with the VAT I Encounter?

When purchasing goods or services for business purposes, suppliers may charge VAT. This must be recorded for every transaction involving VAT. Similarly, when selling to clients, you should determine if the transaction is categorised as a “taxable supply”. If so, you must specify VAT in your invoice and keep an accurate record of these expenses as well. 

A VAT return provides a summary of the amounts paid and received from sales. HMRC only requires the summary numbers to be submitted, but for your safety, you should also keep detailed records of the actual transactions using MTD-compatible software. You might need them in case of an HMRC investigation.

If the taxable turnover of your business exceeds £85,000, you are required to register for VAT. However, businesses can choose to register voluntarily even if their taxable turnover is below this threshold.

What Is a Tax Return? 

All businesses, no matter what their size or type, are required to file a tax return. This is how they declare their income and capital gains. Depending on their eligibility, they may be entitled to certain benefits like tax allowances and tax relief. HMRC oversees the regulation of tax returns.

Filing a tax return on taxable income is a legal obligation. Entrepreneurs with small businesses, self-employed individuals, and sole traders can make annual tax payments to HMRC through a Self-Assessment tax return. This involves the submission of a yearly report containing business gains and losses, including revenue, national insurance (NI), and capital gains.

If you register for Self-Assessment or any tax return successfully, HMRC will issue you with a Unique Taxpayer Reference (UTR) number. Businesses may then prepare their accounts on an annual basis, but it is advisable to finish this by the end of HMRC’s tax year-end (5th of April).

In simple terms, you are required to pay tax via Self Assessment if you do not work for a company and pay tax via Pay As You Earn, and your income exceeds the eligibility threshold of £1,000 per year. Be aware that failure to submit a tax return before the due date will result in penalties.

Main Features of a Tax Return and a VAT Return

VAT is a type of tax charged on transactions that your business makes, both as income and expenditure. VAT is different from the taxes you pay on your declared profits at the end of the year. You need to submit VAT returns to the government periodically – monthly, quarterly, or annually, depending on when you register. 

When you fill out your tax return as a VAT-registered company, you need to use your net income. Since VAT is not part of your income – it’s just money you collect on behalf of HMRC – you don’t need to include it when filing a return.  

If you are registered for VAT under the flat rate scheme, you also need to report any gains or losses from that scheme on your annual tax return. To keep track of all this, you will need a special form of software.

Tax and VAT Returns: The Key Differences

  • VAT is a fee added to transactions for both incomes and expenditures
  • VAT can be reclaimed for certain expenses – transportation or business building costs.
  • VAT can be paid to HMRC according to various schemes, not only annually. 
  • VAT is not considered income but rather a collected amount that is later paid to HMRC.
  • You are obliged to register for VAT when the taxable turnover of your business exceeds £85,000.
  • A Tax return sets out the amount of money generated by the company with the expenses deducted from this sum.
  • Filing a Tax return is a yearly procedure.
  • A Tax return can be based on Self-Assessment (for certain business types).
  • You are obliged to include any taxable income on your tax return.

Some Smart Tips Every Taxpayer Should Follow

Regardless of the type of tax you owe, you are required to follow some rules to stay compliant. Once you’re registered and are required to pay taxes, taking it seriously is a must. 

  • Hire an accountant or tax-paying service to get expert advice and quickly resolve any problems that may arise. 
  • Keep a record of every receipt, bill, and document to make it easier to claim any tax relief you’re entitled to. 
  • Pay your taxes on time and clear any past dues to avoid penalties. 
  • Separate personal and professional expenses, including vehicles, fuel, and machinery. 

To manage your payroll efficiently, you should consider using Payrow. Our expert team helps automate business processes and eliminate routine tasks, making tax processing easier for small and medium-sized businesses, as well as sole traders.

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