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Chapter 5

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?

Working out VAT is straightforward maths. Keeping track of all your transactions is the trickiest part. Let’s take a look at the process.

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

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

How to work out VAT you paid

2. Make a note of the VAT collected on sales

How to work out VAT you collected

3. Add both types of VAT

Calculations for filing a VAT return

4. Run the VAT formula

Calculating VAT owed

If it’s a negative number, you’ll get a refund for that amount.

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.

How software tracks VAT paid and collected

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

This guide is intended as general information only. Always check with a professional for advice.


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