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.
If you get a positive number, you need to pay that amount to HMRC. If it’s a negative number, you’ll get refunded that amount.
How to work out VAT in four steps
1. Note the VAT paid on your business purchases
2. Note the VAT collected on sales
3. Add both types of VAT
4. Run the 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.