How do I know how much VAT to pay?

How do I know how much VAT to pay?

How do I know how much VAT to pay?

When registered for VAT, you act as a tax collector for HMRC. 

You charge VAT on the sales you make, and you reclaim the VAT from the purchases you have made.

You then pay the difference over to HMRC.

This is the standard way of calculating how much VAT is due to be paid.

When you are doing your bookkeeping in software (such as Xero or Quickbooks), you will specify how transactions are treated for VAT, and then you can run a VAT report, which details the VAT due (or reclaimable) to HMRC. 

The VAT payment and return must be received by HMRC on or before one month and seven days after the end of the VAT quarter. 

VAT on sales

The VAT you charge on sales depends on two things: 

  • What you are selling

  • Where/who you are selling to

There are three different VAT rates, and you must make sure you charge the right amount.

If you are selling outside of the UK, there are also different rules for charging VAT. 

You can find out which VAT rate is applicable here - 

You must account for VAT on the full value of what you sell, even if you:

  • receive goods or services instead of money (for example, if you take something in part-exchange)

  • haven’t charged any VAT to the customer - whatever price you charge is treated as including VAT

That means if you are VAT registered and you come to a barter agreement, you still need to pay that VAT (even though you received no cash) over to HMRC. Bartering will cost you cash.

How do I know how much VAT to pay?

VAT on purchases

You can usually reclaim the VAT paid on goods and services purchased for use in your business.

If a purchase is also for personal or private use, you can only reclaim the business proportion of the VAT.

You must keep records to support your claim and show how you arrived at the business proportion for a purchase. You must also have valid VAT invoices.

You cannot reclaim VAT for:

Telling HMRC about how much VAT you have to pay 

HMRC requires that you declare the VAT amount due via submission of a VAT return. This needs to be done electronically, and therefore businesses usually use bookkeeping software (such as Xero or Quickbooks) to prepare their VAT return. 

Making the VAT payment

The VAT payment needs to reach HMRC by the deadline date.  You can find out the methods of making the payment here -

Other methods of calculating VAT due

Other VAT schemes calculate VAT differently, including the Annual Accounting VAT Scheme and Flat Rate VAT scheme. 

You can read about both of these schemes below: 

Annual Accounting VAT Scheme

Flat Rate VAT Scheme

You might also want to read:

How do I pay VAT
What happens when my vat return is late

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About the Author

Annette Ferguson 

Owner of Annette & Co. - Chartered Accountants & Certified Profit First Professionals. Helping online service-based entrepreneurs find clarity in their numbers, increase wealth and have more money in their pockets.