As you probably know, VAT is a tax added onto the price of many (non-essential) goods and services. As with any tax, it's used to pay for things like education, NHS, national defence, emergency services and so on.
VAT is intended to be a tax paid by the final consumer of a good or service, not by the businesses in between.
| Business | VAT it charges | VAT it claims back | Pays HMRC |
|---|---|---|---|
| Plastic suppliersells the plastic for £1 | 20p | £0 | 20p |
| Manufacturersells the screwdriver for £4 | 80p | 20p | 60p |
| Distributorsells it on for £6 | £1.20 | 80p | 40p |
| Tool shopsells it to you for £10 | £2.00 | £1.20 | 80p |
| HMRC gets, in total | £2.00 | ||
Made-up prices, before VAT. You pay £12 at the till, including £2 of VAT. If you're not VAT registered you can't claim it back, so you're the one who pays it.
For example, the purchase of a screwdriver involves different businesses at each stage: sourcing materials, manufacturing, logistics, distribution, and finally retail (e.g. at Screwfix), and each business probably charges VAT to the next one, but none of them actually suffer the cost of that VAT on their profits.
Only you, the tradie who bought the screwdriver at your local tool store, would actually suffer VAT (unless you're VAT registered, in which case the person you charge VAT for your building services will be the final consumer).
This is because VAT registered companies can claim back the VAT they spend on business expenses from the government.
So when the plastic supplier charges the manufacturer VAT, the manufacturer claims that VAT back on their next VAT return. The manufacturer finishes making the screwdriver and sells it to the distribution company with VAT added on the price tag and again, the distribution company will not actually suffer this extra cost, because they'll claim it back on their next VAT return and so on it goes.
The whole purpose of a VAT return is to ensure you as a business do not suffer the cost of VAT if you do not qualify as the end consumer.
So how does a VAT return work?
When you're VAT registered, you suffer VAT from purchases you make but you charge VAT when you make a sale too, so whether or not you are reimbursed for the VAT you've suffered will depend on how much you've already brought back in from sales.
If the VAT you've made back from sales (known as Output VAT) is greater than the VAT you've suffered from your purchases (known as Input VAT), then you'll actually need to pay the difference to HMRC.
For example, let's say you paid £144 for the timber to repair a roof, which includes £24 of VAT, and you charged the customer £570 including VAT. With VAT at 20%, that comes to £95 worth of VAT you've charged on that job, which is higher than the £24 of VAT you've suffered from purchases.
In your next VAT return, you'll need to pay HMRC £71 (£95 − £24) to balance how much you've suffered with how much you've earned.
| VAT you charged the customer (Output VAT) | £95 |
|---|---|
| VAT you paid on the timber (Input VAT) | −£24 |
| You pay HMRC | £71 |
In the end, whether you pay HMRC the difference or they pay you, you're not really making or losing any money. You're either being given back what was already taken from you or you're passing on what isn't yours anyway.
When you have to register, and when returns are due
To become VAT registered, you can sign up voluntarily, but if your taxable turnover crosses £90,000 in any 12 month period, you must register.
VAT returns happen quarterly (every 3 months) for most businesses, but there is an option to do them monthly which can be a great cash flow improvement for businesses who usually spend more VAT on purchases than they make back through sales (therefore receiving VAT refunds).
Note: If you're a subcontractor working for a VAT registered contractor under CIS, the domestic reverse charge usually applies. You don't add VAT to your invoice, and the contractor pays it to HMRC instead. You still claim back the VAT on what you buy, so you'll often get money back on each return, and monthly returns get it to you sooner.
Either way, VAT returns (and payments if required) are due 1 month and 7 days after the end of the VAT period.
So if your VAT period ends on the 30th of September, you have until the 7th of November to complete the return.
This guide gives general information only. Tax rules change and every business is different, so speak to us before acting on it. Rules and figures checked in November 2026.
Quarterly VAT returns come with our Small Subcontractors package, from £68 a month.
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