Introduction
Managing the financial aspects of any business is always a difficult task. Understanding VAT and Tax return is essential for a startup or an ongoing business to keep the financial operations balanced and accurate.
Value-added tax is different from a tax return, but both are submitted to the government’s tax authorities to avoid any legal penalty. This blog will help you understand the basics of VAT and tax returns and how they are different.
What is a VAT return?
A VAT return is a form that a VAT-registered business submits to HMRC to inform them how much it has paid to suppliers on purchases and how much it is charging its customers on sales. It helps HMRC to evaluate whether the business has to pay VAT or reclaim it.
If the sales amount is higher from the purchase amount, then the business has to pay the VAT, but if the purchase amount is higher than sales, then a business can reclaim the amount, and HMRC will pay this amount. The VAT is usually paid to HMRC on a quarterly basis.
What Information is Included in a VAT Return?
Knowing what information is required to file a VAT return is essential for any business. A VAT return should include all the essential information required for the tax laws of a specific country in which it is filed. Some important information includes:
- Your total sales and purchases
- The amount of VAT you owe
- The amount of VAT you can reclaim
- Receiving goods or services instead of money
How Often Do You File a VAT Return?
VAT return is usually submitted every three months, or four times a year, and it is known as the accounting period. However, this frequency varies depending on the VAT accounting scheme and business circumstances.
You can choose quarterly, monthly and annual VAT schemes based on your business needs. Each quarter requires you to submit the VAT return form, pay any VAT due or reclaim VAT you are owed from HMRC. The deadline to submit your VAT return is one month and seven days after the completion of the accounting period.
What is a Tax Return?
A tax return is a form filed with HMRC which shows the complete picture of your business situation, including its income, expenses and other costs, to calculate and pay the tax. It can be submitted on paper or online to HMRC.
Filing a tax return helps you to calculate your tax liability and to claim a refund if you have overpaid it. You have to submit this form every twelve months based on the record of your profit, expenses, income and other financial data. Its different types include a self-assessment tax return and a company tax return.
What is Included in a Tax Return?
Filing a tax return requires financial data of the business. The information a tax return form includes varies due to its different types. A self-assessment tax return may require some specific information compared to a company tax return. Some important information includes:
- Basic information of the entity
- Sales and revenue
- Expenses and costs
- Tax paid or due
- Settlements or adjustments
Difference Between VAT Return and Tax Return
Value-added tax is the amount returned on sales of goods and services based on their value. Businesses collect this amount from consumers and submit it to HMRC, while a tax return is the amount businesses have to pay based on their profit or income. Key differences between VAT return and tax return include:
- VAT is charged to customers and paid to HMRC, while a tax return is paid by an individual or business directly to the tax authority.
- VAT can be quarterly, monthly or annually based on the chosen scheme, while a tax return must be submitted yearly.
- VAT is based on transaction volume, while a tax return is based on profit or income.
Common Mistakes Businesses Make with VAT and Tax Returns
Understanding VAT and tax returns is essential for a business or a startup to keep their financial health stable. Avoiding these common mistakes can help you file your VAT and tax return on time with accurate information.
- Misreporting income
- Using the wrong VAT scheme
- Incomplete record-keeping
- Issuing incorrect invoices
- Relying heavily on software
- Not considering tax implications
Accountant Considerations to Submit VAT and Tax Return?
Although a business and an individual can submit their VAT and tax return on their own, in some complicated situations, you may need an accountant to understand the reasons behind that complication. Consider these factors while choosing an accountant to maintain your VAT and tax return.
Experience
Verify that they have proper experience and are able to determine whether your sales are at the standard rate or not, instead of just filling boxes.
Knowledge
Ensure that they know the type of your business and its operations very well to file your VAT return accurately.
Communication
Check their communication style because discussing and submitting exact information on time is important when filing a VAT or tax return.
Prices
Clearly discuss prices and what is included in them with your accountant to avoid any hidden fees while choosing an accountant.
Conclusion
A VAT return is a consumption-based return collected from customers and submitted to HMRC. In contrast, a tax return is the amount paid by the individual or a business directly to HMRC or another regulatory authority in a specific country.
A VAT return is submitted periodically, based on schemes including quarterly, monthly and yearly, while a tax return is submitted yearly. If you are confused or facing complications in maintaining your VAT and tax returns, you can contact AZ Accounting LTD to submit and maintain your returns according to HMRC requirements.