How can you predict your next VAT return?

VAT returns can be a stressful responsibility for businesses that aren’t set up to manage them effectively. VAT, as you probably know, is one of the most complex taxes that is widely paid in the UK, so the fear of making errors and suffering HMRC penalties is legitimate and understandable.

With the right tools, processes, and know-how, your VAT returns become considerably more manageable. Better still, you can actually predict what your next VAT return will look like; removing further uncertainty and giving you greater confidence.

In this blog, I’ll explain how you can do that through your finance function.

What makes a VAT return predictable?

Most businesses file their VAT returns quarterly, but you can also opt for monthly or annual submissions.

The key thing to remember is that a VAT return is not a single, standalone calculation. It is the output of continual routine financial activities including your sales, purchases, adjustments and corrections.

If all of this information is captured automatically by your finance system or accounting software (such as Xero, QuickBooks or FreeAgent), you have immediate access to all the information needed to forecast your VAT position before the return period ends.

What are the key elements used?

Below are the main elements of your finance function that can be used to predict your VAT position – providing each of them is set up and maintained well.

Bookkeeping Records (Primary Driver)

What it is	What it reveals
Sales invoices	Output VAT
Purchase invoices	Input VAT
Credit notes	Required VAT adjustments

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It is also essential that you have the correct VAT codes to ensure you are applying the right VAT rate to goods and services (i.e. standard, reduced, zero and exempt).

Having all of this information to hand all year round means you get a live VAT estimate at any point of the quarter (or month, if that is how often you submit).

Sales Ledger (Revenue Data)

Your sales ledger is another important component for predicting a VAT return. It is used to estimate:

Total taxable turnover
Output VAT due

This is especially helpful for forecasting when your sales are fairly consistent month-to-month, and your pricing and VAT rates are stable.

Purchase Ledger (Expense Data)

Like your sales ledger, your purchase ledger is also incredibly useful for forecasting. It can be used to estimate:

Recoverable input VAT
Timing differences (i.e. invoices that are received late)

There are, however, some important limitations here that you need to factor in. First, any missing invoices will mean input VAT is understated. Any capital purchases (like buildings, machinery and land) can also distort your forecasts.

Management Accounts

Management accounts are special internal financial reports prepared regularly (usually monthly or quarterly) to help business leaders monitor performance, control costs, and make better business decisions. They are incredibly valuable for several reasons, but they can also help you forecast your VAT position by:

Highlighting trends in sales and expenses
Project VAT using averages
Reveal unusual movements (like sudden spikes in VAT payable/refundable)

To make them even more useful management accounts can also be adjusted for non-VATable items (like wages or dividends), as well as exempt or zero-rated income.

Cash Flow Forecasts

Your VAT predictions contribute directly to your cash flow planning, as well as important planning elements like payment scheduling.

In short:

Forecast VAT = Expected Output VAT – Expected Input VAT

This is especially useful for businesses on the standard (invoice) VAT scheme, along with those planning any large VAT payments or refunds.

What kind of VAT adjustments can you expect?

Even with the best financial data possible, there will always be potential adjustments required. That is why your forecast must allow wiggle room for:

Partially exempt VAT restrictions
Private use adjustments
Fuel scale charges
Bad debt relief
Reverse charge VAT (e.g. construction services)
Flat Rate Scheme percentages (if relevant)

Initial/raw bookkeeping totals will not always make these potential adjustments clear.

There are limitations to what you can predict

Being able to predict your VAT returns ahead of time gives you a big advantage for both compliance and cash flow management, but there are limitations to what you can predict, and how accurately.

For example, you won’t be able to rely fully on predictions if:

You have incomplete records
Your VAT rules are complex or are changing
You have significant transactions that occur late in the period

Your final VAT return will still require proper reconciliation, a careful review by a qualified accountant, and full compliance checks.

The good news is that we can help with that!

How Gravitate can help

Our talented team of experts and technology-driven approach helps us ensure our clients’ VAT returns are completed correctly and submitted on time, every time, so our clients can focus on what matters most.