A VAT return is the quarterly (or monthly) submission to HMRC reporting the Value Added Tax collected on sales (output VAT) and paid on purchases (input VAT). The net amount — output VAT minus input VAT — is either paid to HMRC or reclaimed. VAT significantly affects cash flow timing and must be incorporated into FP&A plans.
In Depth
VAT is the UK's consumption tax, currently at a standard rate of 20%. While VAT is technically borne by the end consumer, businesses act as collection agents — charging VAT on sales, reclaiming VAT on purchases, and remitting the difference to HMRC.
For FP&A teams, VAT matters primarily for cash flow planning. A company collecting 20% VAT on sales and paying 20% VAT on purchases creates a significant cash flow timing impact. The VAT liability builds up during the quarter and is paid to HMRC one month and seven days after the quarter-end (for quarterly filers on the standard schedule).
VAT scheme choices affect cash flow. The standard scheme accounts for VAT when invoices are issued. The cash accounting scheme accounts for VAT when cash is received or paid, which can significantly benefit businesses with long receivable cycles. The flat rate scheme simplifies VAT for smaller businesses.
Since Making Tax Digital (MTD) became mandatory, all VAT-registered businesses must maintain digital records and submit returns through compatible software. This has increased the quality and timeliness of VAT data available for FP&A analysis.
FP&A teams should model VAT cash flows separately from P&L items. Revenue and cost forecasts should be on a VAT-exclusive basis for P&L purposes, with VAT cash flows modelled explicitly in the cash flow forecast.
Real-World Example
A UK company generates £500K monthly revenue (plus £100K output VAT) and incurs £300K monthly costs (plus £60K input VAT). Net quarterly VAT liability: (£300K output - £180K input) = £120K, payable one month after quarter-end. The FP&A team models this £120K quarterly cash outflow explicitly in the 13-week cash flow forecast, which reveals that the January VAT payment coincides with an annual insurance premium, creating a £180K combined outflow that requires a temporary overdraft drawdown.
Related Terms
A cash flow statement reports the inflows and outflows of cash over a period, divided into three cat...
Revenue is the total income generated from the sale of goods or services before any expenses are ded...
The month-end close is the recurring process of finalising all financial transactions for the comple...
Corporation tax is the tax levied on the profits of UK limited companies and certain other entities....
Stop wrestling with spreadsheets. Grove FP gives your finance team a purpose-built platform for budgeting, forecasting, and financial modelling — designed for UK businesses.
FAQ