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chapter four of six. Main types of finance.

Working out VAT – refund or bill?


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Small business guides > Quick guide to VAT > Working out VAT – refund or bill?

Working out VAT – refund or bill?

When submitting VAT returns, most businesses are required to account for all of their purchases and sales. Let’s take a look at the maths you need to do, and some bookkeeping tips.

VAT is a simple formula

Unless you’re in a flat rate scheme, you’ll work out VAT by comparing the amount you paid on purchases to the amount you collected on sales.

VAT formula

You may need to make adjustments for assets, such as a car or computer, that are shared between your business and family. Visit the IRD page on claiming mixed-use assets for more.

How to work out VAT in four steps

1. Note the VAT paid on your business purchases

How to work out VAT you can claim

2. Note the VAT collected on sales

How to work out VAT you owe

3. Add both types of VAT

Calculations for filing a VAT return

4. Run the VAT formula

VAT formula

Avoid nasty surprises with smart bookkeeping

Like any business, you’ll aim to sell more than you buy. If you succeed in doing that, you’ll most likely end up with a VAT bill. Run the four-step VAT equation regularly so you can:

  • work out how big your VAT payment is shaping up to be

  • transfer cash to a separate bank account to cover the bill

Automate your VAT calculations

You can use online accounting software like Xero to stay on top of VAT. It automatically collects sales and purchase information from multiple sources, and does the maths for you.

The software keeps a running count of your VAT situation so you always know where you stand. When the VAT period is over, you just connect to HMRC and submit your return online. All the information is ready to go.


Chapter 6: Submitting your VAT return

There’s no need to feel daunted by the VAT filing process. We’ll take you through a few simple and painless ways to file your VAT in the UK.

Read next chapter