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VAT Account: Rules of what a VAT account should look like

Aug 12, 2023 | UK Accounting

Take control of your VAT account and optimise your VAT management. Maintaining a VAT account is essential for complying with tax regulations and ensuring that your business is accounting for VAT correctly. Read this blog post to learn what a VAT account should look like.

Rules of What a VAT Account Should Look Like? 

In today’s competitive business environment, optimising your finances and staying compliant with VAT regulations is more important than ever.

Understanding the rules and requirements of a VAT account, managing bad debts, and adhering to timelines are critical aspects of effective VAT management. Failing to do so can have serious consequences for your profitability and may hinder your growth prospects.

In this comprehensive guide, we will delve into the essential rules that a VAT account should adhere to, the impact of bad debts on VAT management, and the importance of making it to the deadlines to avoid penalties and fines.

We will provide practical insights, tips, and strategies to help you navigate the complexities of VAT management in the UK setting and ensure that your business stays on the right track.

VAT Account Considerations

A VAT account is a record of all the VAT transactions that your business has made. It should provide an organized overview of your VAT-related income and expenses. Here are some of what to keep in mind when setting up and maintaining a VAT account:

Detailed Transaction Records

Your VAT account should reflect all your business’s VAT transactions, including; sales, purchases, and other relevant expenses. Keep your records accurate and up-to-date to avoid discrepancies or errors.

Clear Separation of VAT Amounts

Your VAT account should separate the VAT amounts charged to your customers (output VAT) and the VAT amounts you paid to your suppliers (input VAT).

This will help you accurately calculate the VAT you owe to HM Revenue and Customs (HMRC) or can claim back as input VAT.

Proper Use of VAT Codes

When recording VAT transactions, use the appropriate VAT codes to indicate the VAT rate applicable to each transaction. You can use either the standard rate (currently 20%), reduced rate (now 5%), or zero rates (0%) depending on the product or services you sell.

The correct VAT codes will help you generate accurate VAT reports and ensure compliance with HMRC regulations.

Accurate Calculation of VAT

Ensure your VAT account accurately calculates the VAT due on sales and recoverable on purchases. This includes proper calculation of VAT at the correct rate, consideration of any VAT exemptions or reliefs, and appropriate treatment of any VAT adjustments or corrections.

Record of VAT Payments

Maintain a record of all VAT payments made to HMRC, including payment dates, amounts, and relevant payment references, to ensure that all VAT payments are appropriately accounted for and reconciled with the VAT liability calculated in your VAT account.

Compliance with MTD Submission Requirements

You need to submit your VAT returns using compatible accounting software that meets HMRC’s requirements under Making Tax Digital (MTD).

As of April 2019, the UK introduced the MTD initiative, which requires businesses to maintain digital records and submit VAT returns using compatible accounting software.

Ensure that your VAT account is maintained in a format compatible with your chosen MTD solution and can be easily used for submitting digital VAT returns to ensure compliance with MTD submission requirements.

Handling Bad Debts

Unfortunately, not all customers may pay their invoices on time, resulting in bad debts. When it comes to VAT, bad debts can have implications on your VAT account. Here’s what you need to know:

Time Limit for Claiming Bad Debt Relief

In the UK, you can claim bad debt relief on VAT that you have accounted for and paid to HMRC but was not collected from your customers.

However, there is a time limit of four years and six months from the date of supply to claim bad debt relief. After this period, you can no longer make a claim.

Proper Documentation

You must keep a copy of the VAT invoices for the supplies on which you’re claiming a refund.

Additionally, you must maintain a separate bad debt account, including detailed information such as the amount written off as a bad debt, the total amount of payment received and VAT charged on each supply, and the name of your customer, among other details.

Ensuring that you have accurate and complete documentation will help you properly claim and support your bad debt relief refund in your VAT account.

Important Timelines

Compliance with VAT deadlines is crucial to avoid penalties and interest charges. Here are some important timelines to keep in mind:

VAT Return Filing

VAT returns must be filed with HMRC on a regular basis, usually quarterly or monthly, depending on the size and turnover of your business. Failure to file VAT returns on time can result in penalties.

VAT Payment

VAT owed to HMRC must be paid by the due date specified on your VAT return. Late payment can result in interest charges and penalties.

VAT Registration

If your business’s taxable turnover exceeds the VAT registration threshold (currently £85,000), you must register for VAT within 30 days of reaching the threshold. Failure to register for VAT on time can result in penalties.

Frequently Asked Questions

  • What are the implications of bad debts on VAT management?

    Bad debts can have significant implications on VAT management. When a customer fails to pay an invoice, the VAT previously accounted for on the sale may need to be adjusted.

    This can result in a reduction in the VAT liability and potential adjustments to VAT reclaims.

  • What records do I need to keep for VAT purposes? 

    Keeping accurate and complete records is essential for VAT purposes. You must maintain records of all business transactions, including sales, purchases, expenses, and VAT payments/receipts.

    These records should include details such as dates, invoice numbers, customer/supplier information, and VAT amounts. Failure to maintain proper records can result in penalties and compliance issues.

  • How can I keep accurate records for my VAT account?

    One effective way is using compliant accounting software to manage VAT calculations, recording, and reporting.

    These tools can help you maintain records of all your business transactions, automate VAT calculations, and ensure timely and accurate VAT submissions.

    Regularly reviewing, reconciling, and updating your VAT records can also help maintain accuracy and compliance with VAT regulations.


Mastering VAT management is critical to the financial success of your business, and one of the aspects of this is knowing what a VAT account should look like, along with other VAT rules of HMRC. Consult us at Sterlinx Global for further VAT advice.

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