You’re VAT registered, you’ve been charging VAT to your clients, and now it’s time to actually pay HMRC what you owe. But how exactly does that work?
The good news is that paying VAT isn’t just about handing over everything you’ve collected. You get to subtract the VAT you’ve paid on business expenses first. Here’s what you need to know.
Understanding what you owe
At the end of every accounting period, you’ll need to work out the balance between two figures:
- The total VAT you’ve collected from your clients on your sales and income
- The total VAT you’ve paid when making business purchases
What you actually pay to HMRC is the difference between these two amounts.
VAT to pay = VAT collected - VAT paid on expenses
So if you’ve collected £5,000 in VAT from your clients, but you’ve paid £1,200 in VAT on business expenses, you’d owe HMRC £3,800 in VAT.
💡If your pre-VAT turnover is less than £150,000 a year, you may be eligible for the VAT Flat Rate Scheme, which simplifies your VAT calculations. For more information, visit the gov.uk website.
What if you’ve paid more VAT than you’ve collected?
Sometimes, you might find that you’ve paid more VAT on business expenses than you’ve collected from your clients during an accounting period.
In this situation, you don’t owe HMRC anything. Instead, you’d be eligible for a VAT repayment, where HMRC pays you back the difference.
Keep VAT separate from your income
Here’s an important tip: hold any VAT you collect separately from the rest of your income. That way, you’ll always have the right amount on hand when it’s time to pay HMRC.
If you don’t keep it separate and accidentally spend it, you’ll still owe HMRC the full amount. That can lead to cash flow problems, not to mention fines and penalties if you can’t pay on time.
When do you need to pay?
Your VAT payment deadline depends on your accounting period – whether you’re filing monthly, quarterly, or annually.
For monthly and quarterly accounting periods, your VAT payment is due one calendar month and seven days after your accounting period ends. So if your quarterly period runs from 1st January to 31st March, your payment would be due on 7th May.
If you’re filing annually, you’ll need to make advance payments throughout the year (either nine monthly payments of 10% or three quarterly payments of 25%), with a final payment due two months after your accounting period ends.
Filing your VAT return
When you pay VAT, you’ll also need to submit a VAT return at the same time. As of 1st April 2022, all VAT-registered businesses must use Making Tax Digital-compliant software (like Hnry!) to submit their returns.
Your VAT return essentially tells HMRC how much VAT you’ve collected vs. how much you’ve paid while purchasing allowable business expenses. Through your VAT return, HMRC can see how you arrived at the amount of VAT you owe them (or are claiming back).
💡 More VAT questions? We’ve got answers! Check out our complete guide to VAT for sole traders.
Hnry sorts all your VAT admin
Managing VAT payments, keeping track of deadlines, making sure you’ve set aside the right amount – it’s a lot to juggle on top of running your freelance business.
At Hnry, we handle all of this automatically. We calculate and deduct your VAT as you earn, hold it separately from your income, and pay HMRC on your behalf when it’s due. We also submit all your VAT returns using our Making Tax Digital for VAT-compliant software.
You focus on the fun stuff (like the actual job), and we make sure your VAT obligations are sorted. No missed payments, no penalties, no stress.
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