Understanding VAT returns: what’s expected and how to stay compliant

With speculation around the UK government lowering the VAT registration threshold to £30,000, thousands of small businesses may soon find themselves needing to submit VAT returns for the first time. Whether you’re already VAT-registered or preparing for potential changes, it’s important to understand what HMRC expects and how to stay compliant.

Read our blog to learn more about the essentials of VAT returns and how to manage them confidently — especially if your business is approaching the new proposed threshold.

What is a VAT return?

A VAT return is a summary of your business’s VAT position over a specific accounting period, usually every three months. It includes:

• VAT charged on sales (output tax)
• VAT paid on purchases (input tax)
• The difference between the two, which is either paid to or reclaimed from HMRC

Returns must be submitted using Making Tax Digital (MTD)-compatible software, unless you qualify for an exemption.

What HMRC expects from your VAT return

According to HMRC’s VAT guidance, businesses must:

• Keep accurate digital records of all VAT-related transactions
• Apply the correct VAT treatment to each sale or purchase
• Maintain a clear audit trail to support the figures submitted
• Submit returns on time, usually every quarter
• Pay any VAT owed by the deadline

Common mistakes to avoid

Even small errors can lead to penalties or trigger compliance checks. Common issues include:

• Using the wrong VAT rate
• Missing submission or payment deadlines
• Incorrectly reclaiming VAT on non-business expenses
• Failing to adjust for credit notes or discounts

HMRC expects businesses to take reasonable care, and repeated mistakes may be treated as careless or deliberate.

How to stay compliant — especially if you’re new to VAT

1. Start keeping digital records now - Even if you’re not yet registered, getting into the habit of recording income and expenses digitally will make the transition smoother.

2. Choose MTD-compatible software - HMRC requires VAT returns to be submitted through approved platforms. Popular options include Xero, QuickBooks, Sage, and FreeAgent.

3. Understand your VAT obligations - Learn which goods and services are standard-rated, reduced-rated, zero-rated, or exempt. This affects how you charge VAT and what you can reclaim.

4. Document your processes -  HMRC expects businesses to have clear documentation showing how VAT is calculated and reported. This includes policies for expenses, invoicing, and adjustments.

5. Work with an accountant - If you’re unsure about VAT rules or software, an accountant can help you set up systems, avoid errors, and stay compliant.

If the VAT threshold drops to £30,000, many small businesses will need to submit VAT returns for the first time. Understanding what’s expected and preparing early will help you stay compliant and avoid unnecessary stress.

Whether you’re already registered or anticipating changes, now is the time to review your processes and speak to an accountant who understands the needs of small businesses.