Value added tax | ACCA Qualification | Students

This two-part article is relevant to those of you sitting the TX-UK exam in the period 1 June 2026 to 31 March 2027 and in June 2027, and is based on tax legislation as it applies to the tax year 2025-26 (Finance Act 2025).

Value added tax (VAT) returns

VAT returns are normally completed on a quarterly basis. Each return shows the total output VAT and total input VAT for the quarter to which it relates.

Virtually all businesses, including those voluntarily registered for VAT, have to use making tax digital software to directly submit their VAT returns to HM Revenue and Customs (HMRC). They also have to keep digital records.

VAT returns have to be submitted within one month and seven days of the end of the relevant quarter. Any VAT payable is due at the same time, and must be paid electronically.

Example 17

For the VAT quarter ended 31 March 2026, Jet has output VAT of £12,400 and input VAT of £7,100.

Jet’s VAT return for the quarter ended 31 March 2026 will have to be submitted directly to HMRC using making tax digital software by 7 May 2026, being one month and seven days after the end of the quarter.
VAT of £5,300 (£12,400 – £7,100) is payable electronically, and this will be due on 7 May 2026 when the VAT return is submitted.

Because VAT is a self-assessed tax, HMRC can make control visits to VAT registered companies. The purpose of a control visit is to provide an opportunity for HMRC to check the accuracy of VAT returns.

VAT invoices

A VAT registered business may have to issue VAT invoices in respect of standard rated supplies. VAT invoices must contain certain information.

Example 18

Keen Ltd registered for VAT on 1 March 2026.

The company only sells goods, and at present issues sales invoices which show (1) the invoice date and invoice number, (2) the type of supply, (3) the quantity and a description of the goods supplied, (4) Keen Ltd’s name and address, and (5) the name and address of the customer. Keen Ltd does not offer any discount for prompt payment.

The company wants to know the circumstances in which it is and is not required to issue a VAT invoice, the period during which such an invoice should be issued, and the additional information which it will have to show on its sales invoices in order that these are valid for VAT purposes.

Issue of VAT invoices

Keen Ltd must issue a VAT invoice when it makes a standard rated supply to a VAT registered customer.
A VAT invoice is not required if the supply is exempt, zero-rated, or if the supply is to a non-VAT registered customer.
A VAT invoice should be issued within 30 days of the date when the supply of goods is treated as being made.

Additional information

The following information is required:

Keen Ltd’s VAT registration number.
The date of supply (the tax point).
The rate of VAT for each supply.
The VAT-exclusive amount for each supply.
The total VAT-exclusive amount.
The amount of VAT payable.

Simplified VAT invoices

A simplified (or less detailed) VAT invoice can be issued where the VAT inclusive total of the invoice is less than £250.

Example 19

Jude is registered for VAT, but only a few of her customers require a VAT invoice. All of Jude’s sales are for less than £250.

A simplified invoice should be issued when a customer requests a VAT invoice. This must show the following information:

Jude’s name and address.
Jude’s VAT registration number.
The date of supply (the tax point).
A description of the goods or services supplied.
The VAT inclusive total.
The rate of VAT.

Late submission penalties

Under a points-based system, a business incurs a penalty point each time a VAT return is submitted late.

If a penalty threshold of four points is reached, a £200 penalty is then charged.
Thereafter, subsequent late VAT returns also incur a £200 penalty.
Penalty points normally expire after two years. However, they do not expire once the penalty threshold has been reached.
Once the penalty threshold has been reached, a business has to submit VAT returns on time over a period of twelve months (so four quarterly returns) for their penalty points total to be reset to zero.

Late submission penalties are only examined in the context of quarterly VAT returns.

Late payment penalties

Each late payment is considered separately.

No penalty is charged if the VAT liability is paid within 15 days of the due date.
A 3% penalty is charged if the VAT liability is paid within 16 and 30 days of the due date.
The penalty is increased to 6% if the VAT liability is paid later than 30 days of the due date.
In addition, where the VAT liability is paid more than 30 days late, a daily penalty at an annual rate of 10% is charged beginning after the initial 30-day period.

Late payment penalties are only examined in the context of quarterly VAT returns.

Late payment interest

Regardless of whether any late payment penalties are incurred, late payment interest is charged from the due date until the date that the VAT liability is paid.

The late payment penalties and late payment interest can be summarised as follows:

	Up to 15 days late	16 to 30 days late	More than 30 days late
Penalty	None	3%	6%
Daily penalty	No	No	Yes
Interest	Yes	Yes	Yes

Example 20

Pen was late in submitting her VAT returns and paying the related VAT liabilities as follows:

Quarter ended	VAT due £	Days late
30 June 2025	32,000	10
30 September 2025	36,000	50
31 December 2025	41,000	18
31 March 2026	29,000	8

Quarter ended 30 June 2025

No penalty because the VAT liability was paid within 15 days of the due date.
One penalty point incurred for late submission.
Late payment interest is £75 (32,000 x 8.50% x 10/365).

Quarter ended 30 September 2025

A 6% penalty charged (36,000 x 6% = £2,160) because the VAT liability was paid more than 30 days late.
There is also a daily penalty for 20 days (50 days less the initial 30 days). This amounts to £197 (36,000 x 10% x 20/365).
A further penalty point incurred, making two cumulatively.
Late payment interest is £419 (36,000 x 8.50% x 50/365).

Quarter ended 31 December 2025

A 3% penalty charged (41,000 x 3% = £1,230) because the VAT liability was paid within 16 and 30 days of the due date.
A further penalty point incurred, making three cumulatively.
Late payment interest is £172 (41,000 x 8.50% x 18/365).

Quarter ended 31 March 2026

No penalty because the VAT liability was paid within 15 days of the due date.
A further penalty point incurred. Since the penalty threshold of four points has been reached, a £200 penalty is charged.
Late payment interest is £54 (29,000 x 8.50% x 8/365).

Reasonable excuse

Late payment and late submission penalties will not be charged if a business has a reasonable excuse for the late payment or the late submission.

For example, an unexpected stay in hospital should count as a reasonable excuse for either late payment or late submission. However, having insufficient funds will not normally be accepted by HMRC as a reasonable excuse for late payment.

Errors in a VAT return

A VAT registered business which makes an error in a VAT return resulting in the underpayment of VAT, can be subject to both a penalty for an incorrect return and late payment interest.

Example 21

During March 2026, Zoo Ltd discovered that it had incorrectly claimed input VAT on the purchase of three cars when completing its VAT return for the quarter ended 31 December 2025.

If the error is less than the higher of £10,000 or 1% of Zoo Ltd’s turnover for the quarter ended 31 March 2026, the error can be corrected by simply entering it on the VAT return for the quarter ended 31 March 2026.
If the error exceeds the limit (and in all cases if the error exceeds £50,000), it must be dealt with by making a separate error correction.
There will only be late payment interest where a separate error correction is required, but a penalty for an incorrect return might be imposed in either case.

The amount of penalty is based on the amount of VAT understated, but the actual penalty payable is linked to a taxpayer’s behaviour.

Example 22

Continuing with example 21

HMRC will not charge a penalty if Zoo Ltd has taken reasonable care, provided the company informs them of the error.
However, claiming input VAT on the purchase of cars is more likely to be treated as careless, since Zoo Ltd would be expected to know that such input VAT is not recoverable.
The maximum amount of penalty will therefore be 30% of the amount of input VAT incorrectly claimed, but this penalty could be reduced to nil if unprompted disclosure is made to HMRC.

Imports and exports

When a UK VAT registered business imports goods into the UK, VAT has to be accounted for according to the date the goods are imported. This import VAT is at the UK VAT rate.

A system of postponed accounting applies so that the import VAT is declared on the VAT return as output VAT, but can be reclaimed as input VAT on the same VAT return (a reverse charge procedure).

Therefore, for most businesses, there is no VAT cost because the output VAT and corresponding input VAT are equal. However, there is a VAT cost if a business makes exempt supplies, since an exempt business cannot reclaim any input VAT, or if the imported goods are of a type for which input VAT is not recoverable (such as cars for private use).

Postponed accounting does not have to be used, and there are some circumstances when it cannot be used. However, as far as TX-UK is concerned, it should be assumed that postponed accounting applies to all imports of goods.

Example 23

Yung Ltd is registered for VAT in the UK. The company has the choice of purchasing goods costing £1,000 (exclusive of VAT) from either a UK supplier or an overseas supplier.

If Yung Ltd purchases the goods from a UK supplier, it will pay the supplier £1,200 (1,000 plus VAT of 200 (1,000 x 20%)), and then reclaim input VAT of £200.
If the goods are instead purchased from an overseas supplier, Yung Ltd will pay £1,000 to the supplier. On its VAT return, Yung Ltd will then show output VAT of £200 and input VAT of £200.
The end result is the same in each case; a net of VAT cost of £1,000. However, with the import there is no need to actually pay the VAT subsequent to its recovery as input VAT.

When a UK VAT registered business exports goods, the supply is zero-rated.

International services

Services supplied to a VAT registered business are generally treated as being supplied in the country where the customer is situated. Therefore, where a UK VAT registered business receives international services the place of supply will be the UK.

Example 24

Wing Ltd is registered for VAT in the UK. The company receives supplies of standard rated services from VAT registered businesses situated overseas. As business-to-business services, these are treated as being supplied in the UK.

VAT will be accounted for on the earlier of the date when the service is completed or the date it is paid for.
The VAT charged at the UK VAT rate should be declared on Wing Ltd’s VAT return as output VAT, but will then be reclaimed as input VAT on the same VAT return (a similar reverse charge procedure to that for imports).

The supply of international services by a UK VAT registered business will generally be outside the scope of UK VAT as the place of supply will be outside the UK.

The cash accounting, annual accounting and flat rate schemes

The cash accounting, annual accounting and flat rate schemes are all available to small businesses. Be careful the schemes are not confused, as they are completely different from each other.

The cash accounting scheme enables a business to account for VAT on a cash basis. The scheme will normally be beneficial where a period of credit is given to customers. It also results in automatic relief for impairment losses. The disadvantage is that input VAT will only be recovered when purchases and expenses are paid for.

Example 25

Ming is registered for VAT. She has annual standard rated sales of £800,000. This figure is inclusive of VAT. Ming pays her expenses on a cash basis, but allows customers three months credit when paying for sales. Several of her customers have recently defaulted on the payment of their debts.

Ming can use the cash accounting scheme if her expected taxable turnover for the next 12 months does not exceed £1,350,000 exclusive of VAT.
In addition, she must be up to date with her VAT returns and VAT payments.
Output VAT will be accounted for three months later than at present since the scheme will result in the tax point becoming the date when payment is received from customers.
The recovery of input VAT on expenses will not be affected as these are paid in cash.
The scheme will provide automatic relief for an impairment loss should a customer default on the payment of a debt.

In contrast, the advantage of the annual accounting scheme is mainly administrative, since a business only has to submit one VAT return each year.

Example 26

Newt Ltd is registered for VAT. The company has annual standard rated sales of £950,000. This figure is inclusive of VAT. Because of bookkeeping problems, Newt Ltd has been late in submitting its recent VAT returns.

Newt Ltd can apply to use the annual accounting scheme if its expected taxable turnover for the next 12 months does not exceed £1,350,000 exclusive of VAT.
In addition, the company must be up to date with its VAT returns and VAT payments.
Under the scheme, only one VAT return is submitted each year. This is due within two months of the end of the annual VAT period.
The resulting reduced administration should mean that default surcharges are avoided in respect of the late submission of VAT returns.
Nine monthly payments are made on account of VAT commencing in month four of the annual VAT return period. Any balancing payment is made with the VAT return.
Each payment on account will be 10% of the VAT payable for the previous year. This will improve both budgeting and possibly cash flow where a business is expanding.

The flat rate scheme can simplify the way in which small businesses calculate their VAT liability.

Under the flat rate scheme, a business calculates its VAT liability by simply applying a flat rate percentage to total income. This removes the need to calculate and record output VAT and input VAT.

The flat rate percentage is applied to the gross total income figure (including exempt supplies) with no input VAT being recovered. The percentage varies according to the type of trade which the business is involved in, and will be given to you in the examination.

Example 27

Omah registered for VAT on 1 January 2026. He has annual standard rated sales of £100,000, and these are all made to the general public. Omah has annual standard rated expenses of £16,000. Both figures are exclusive of VAT. The relevant flat rate scheme percentage for Omah’s trade is 13%.

Omah can join the flat rate scheme if his expected taxable turnover (excluding VAT) for the next 12 months does not exceed £150,000.
He can continue to use the scheme until his total turnover (including VAT, but excluding sales of capital assets) for the previous year exceeds £230,000.
The main advantage of the scheme is the simplified VAT administration. Omah’s customers are not VAT registered, so there will be no need to issue VAT invoices.
Using the normal basis of calculating the VAT liability, Omah will have to pay annual VAT of £16,800 ((100,000 – 16,000) x 20%).
If he uses the flat rate scheme, Omah will pay VAT of £15,600 ((100,000 + 20,000 (output VAT of 100,000 x 20%)) x 13%), which is an annual saving of £1,200 (16,800 – 15,600)

A flat rate of 16.5% applies to those businesses which have no, or only a limited amount of, purchases of goods. You will not be expected to establish whether the flat rate of 16.5% is applicable, but a question could be set where this rate applies.

There is very little advantage to using the flat rate scheme if the 16.5% rate applies because it is equivalent to a rate of 19.8% on the net turnover compared to the normal VAT rate of 20%. If a business has much input VAT, the flat rate scheme will not be beneficial if the 16.5% rate applies.

Example 28

Continuing with example 27, assume that the relevant flat rate scheme percentage for Omah’s trade is instead 16.5%.

If Omah uses the flat rate scheme, he will now pay VAT of £19,800 ((100,000 + 20,000) x 16.5%).
This is £3,000 (19,800 – 16,800) more than the normal basis of calculating the VAT liability.

Conclusion

There is quite a lot to remember when studying VAT, although the subject itself is not particularly complicated. Several different topics will usually be covered within a longer-style VAT question, so it is important to cover the whole subject area.

Written by a member of the TX-UK examining team

Value added tax, part 2.