How to do a VAT Return on Xero: A Beginners Guide to Xero VAT

Introduction

This tutorial will guide you through the process of completing a VAT return using Xero accounting software. Understanding VAT returns is essential for businesses that are VAT registered, as it ensures compliance with tax regulations. This guide will break down each step to make the process straightforward and manageable, even for beginners.

Step 1: Understand VAT Returns

• VAT (Value Added Tax) returns are submitted periodically to report the VAT collected on sales and the VAT paid on purchases.
• Familiarize yourself with the following terms:
  • Output Tax: VAT you charge on sales.
  • Input Tax: VAT you pay on purchases.

Practical Tips

• Keep accurate records of all transactions to simplify the VAT return process.
• Use Xero to track your sales and purchases automatically.

Step 2: Prepare Your VAT Returns

• Gather all necessary documentation, including:
  • Sales invoices
  • Purchase invoices
  • Bank statements
• Review your sales and purchases to ensure all transactions are recorded in Xero.

Common Pitfalls to Avoid

• Ensure no transactions are missing. Incomplete records can lead to incorrect VAT returns.
• Double-check the VAT rates applied to sales and purchases.

Step 3: Connect Xero Using MTD VAT

• Make sure you have signed up for the Making Tax Digital (MTD) service if you're in the UK.
• Log in to your Xero account.
• Navigate to the “Accounting” tab and select “Advanced” then “Financial Settings”.
• Connect to HMRC by following these steps:
  • Click on “Connect to HMRC”.
  • Authorize Xero to handle your VAT returns under MTD.

Practical Tips

• Ensure that your HMRC account is active and linked to the correct VAT registration number.
• Keep your Xero software updated to maintain compatibility with MTD requirements.

Step 4: Complete Your Xero VAT Returns

• Go to the “Reports” section in Xero.
• Select “VAT Return” under the “Taxes” category.
• Choose the period for which you are submitting the return.
• Review the details shown:
  • It should include the total output tax and input tax.
  • Verify that totals are correct.

Steps to Submit

1. Click on the “Submit to HMRC” button.
2. Confirm the submission.
3. Save a copy of the VAT return for your records.

Common Pitfalls to Avoid

• Do not submit the VAT return unless you have reviewed all details thoroughly.
• Keep a backup of your VAT return submission confirmation.

Conclusion

Completing a VAT return in Xero involves understanding VAT, preparing your records, connecting to MTD VAT, and finalizing the return. By following these steps, you can ensure compliance and maintain accurate financial records. After completing your VAT return, consider exploring more advanced Xero features to enhance your accounting practices.