Chapter 5

Working out your VAT refund or payment

Working out VAT is simple maths. Keeping track of all your transactions is the tricky part. Let’s learn the process.

A person on their phone calculating VAT

Published Wednesday 22 September 2021

VAT is a simple formula

Unless you’re using the 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. Make a note of the VAT paid on your business purchases

2. Make a note of 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 records VAT collected and paid, 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.

Disclaimer

Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.

VAT Guide For Business

Making a start with VAT? Want to know more about how MTD for VAT impacts you? This guide will help you get sorted.

  1. What is VAT and how much is it?

    You’ve probably heard about VAT before – it stands for Value Added Tax and is added onto prices in the UK.

  2. Registering for VAT

    Find out if your business needs to worry about VAT. And if so, learn how to register for VAT.

  3. Calculating VAT and issuing VAT invoices

    If you’re a VAT-registered business you must add VAT to your prices. You also need to issue VAT invoices. Find out how.

  4. Claiming back VAT

    VAT-registered businesses can claim back the VAT they pay on business expenses. Let’s learn how.

  5. Working out your VAT refund or payment

    Working out VAT is simple maths. Keeping track of all your transactions is the tricky part. Let’s learn the process.

  6. Filing VAT return through Making Tax Digital

    Once you’ve registered for VAT, you’ll need to submit returns online regularly – and square up with HMRC. Here’s how.

  7. Tools and guides for your business

    Now you know the ins and outs of VAT, but it can be tough to keep on top of it all. Xero’s got the resources to help.

Download the VAT Guide for Business

Get your VAT sorted. Fill out the form to receive this guide as a PDF.

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Now that you have your guide

Managing finances can feel overwhelming. With Xero’s powerful tools, small businesses can stay organised and confident.