What You Need To Know About Paying VAT

Businesses in the UK usually submit Value Added Tax (VAT) returns on a quarterly basis. It is now mandatory for almost all businesses (although there are a few exceptions) to submit the VAT return online and make the payment online such that HMRC receives it a week after the end of the month following the end of the VAT period, for instance if the quarter relating to a particular payment ends on 30th September, the deadline for the filing of the return and HMRC receiving the payment is 7th November.

Penalties of up to 15 per cent of your bill can be added for late payment so it is essential to make your payments on time. And, remember, it is the date when HMRC receives your payment that counts not when you send it so check how long payments take from your bank and plan accordingly. If you employ a chartered accountant or tax advisor then they will make sure that all of this is handled appropriately.

When paying VAT online you can choose to pay either by Debit or Credit Card, Direct Debit, CHAPs or BACS payments but check with your bank for any charges that might apply before deciding which method to use.

Direct Debits are normally free and have the advantage of ensuring that you are never late with your payment; all you have to worry about then is filing the VAT return on time. However, you need to be sure that there will always be sufficient funds to cover the direct debit payments as a returned payment could result in a penalty from HMRC and a charge by your bank.

A good way to manage your funds for VAT (and, indeed, other taxes) is to have a separate bank account into which you transfer the appropriate amount each month. If you do this by Direct Debit or Standing Order then you will not have to think about it each month once it has been set up. This is a good habit to get into and, of course, helps spread the cost of taxes across the whole year and avoids the situation of being short of funds at quarter end or year end.

If you run a small business with turnover below a certain threshold (currently £1.35m per year) can benefit from a regulation that means they are only required to pay the VAT on sales once they have received the income. So, if you have invoiced a major client but haven't been paid by the end of the current quarter you will not have to pay the VAT until you have been paid. This is also of benefit if one of your clients defaults on a payment – you will not have to pay the VAT at all. You can find out more about how this works by talking to your accountant or tax advisor.

Smaller Businesses Can Spread Their Payments

Again if the turnover of your business is below the current threshold you could also choose to spread the cost by paying monthly to HMRC of an amount calculated using your previous year's VAT bill. Just like a fixed fee accounting service helps you budget effectively so does this system where you make the payments for 9 months and then the true VAT amount is calculated and the balance paid when the final annual VAT return is due.

While this system can help with cashflow and avoid the situation where you do not have the funds to pay and risk a penalty, on the other hand it has the disadvantage of not allowing you to benefit from interest earned on the VAT as it sits in your own high-interest account.

The author has written and published articles on a wide range of topics including Small Business Advice, Tax and Accounting, Interior Design, House Renovation and Project Management.