How do I prepare for my first VAT return as a sole trader?

Preparing for your first VAT return as a sole trader: what to expect

If you’re a sole trader who has registered for VAT, your first VAT return can feel like a big step up in admin. Suddenly you’re not just tracking income and expenses for your own records—you’re summarising VAT you’ve charged (output tax), VAT you’ve paid (input tax), and paying the difference to HMRC (or claiming a refund). The good news is that once you understand the moving parts and set up a routine, VAT returns become a repeatable process rather than a recurring panic.

This article walks you through how to prepare for your first VAT return as a UK sole trader, from organising your records and choosing the right approach to checking common problem areas and submitting on time. It’s written to be practical: what you need to do, why it matters, and how to avoid the typical traps that catch people in their first filing period.

Start by understanding what a VAT return actually is

A VAT return is a summary of VAT activity over a set period (your “VAT period”), usually quarterly. You’ll total up:

1) The VAT you charged customers on your sales (output VAT).

2) The VAT you paid on business purchases and expenses that you’re allowed to reclaim (input VAT).

If output VAT is higher than input VAT, you pay the difference to HMRC. If input VAT is higher than output VAT, you typically receive a refund (though there are reasons this might be queried or offset).

Even if you had little or no activity, you still usually need to submit a return for each period unless you’ve deregistered or HMRC has agreed otherwise. Missing a return is a compliance issue even when no VAT is due.

Know your VAT scheme (it changes how you prepare)

Before you start gathering numbers, confirm which VAT scheme you’re on. Your scheme determines what you record and how you calculate what’s due. Common schemes for sole traders include:

Standard VAT accounting: You account for VAT based on invoice date (tax point). You include VAT on sales you’ve invoiced during the period and reclaim VAT on purchase invoices dated in the period, subject to rules.

Cash Accounting Scheme: You account for VAT when you receive payment from customers and when you pay suppliers. This can help cashflow because you’re not paying VAT before you’ve been paid, but your record-keeping needs to track payment dates precisely.

Flat Rate Scheme: Instead of reclaiming VAT on most purchases, you pay HMRC a fixed percentage of your VAT-inclusive turnover. You still charge customers VAT in the usual way, but your payment calculation is simplified. You may still reclaim VAT on certain capital assets above specific thresholds. Preparation focuses on correctly categorising turnover and applying the correct flat rate percentage.

Annual Accounting Scheme: You make payments on account and submit one return per year. This changes your routine and may make the first “return” feel less immediate, but you still need strong records.

Many first-time VAT filers assume everyone does VAT the same way. If you’re on Cash Accounting or Flat Rate, copying advice meant for Standard Accounting can lead to the wrong figures. If you’re not sure, check your VAT registration confirmation or your HMRC online VAT account settings.

Confirm your VAT return period and deadlines

Your first VAT return covers your first VAT period after registration (or the period allocated by HMRC). Don’t assume it lines up with calendar quarters. Your periods might run, for example, March–May or April–June, depending on your assigned cycle.

Mark two key dates:

Submission deadline: Typically one month and seven days after the end of the VAT period for quarterly returns.

Payment deadline: Usually the same date as the submission deadline, unless you pay by a method that takes longer to clear.

Even if you plan to pay by Direct Debit, you should still treat the deadline seriously. Direct Debit requires set-up time, and the collection date may be earlier than the deadline to allow processing. If you’re paying by bank transfer, aim to send funds a few days early so they clear in time.

Get your bookkeeping in order before you touch the return

The most stressful VAT returns are the ones done from a pile of receipts and a vague memory of what happened. Preparation is about getting the underlying bookkeeping reliable. Aim for these basics:

Sales records: A clear list of invoices issued (or payments received, if using Cash Accounting), showing net amount, VAT rate, VAT amount, and total. You also need records for credit notes and refunds to customers.

Purchase records: A list of supplier invoices (or payments made, if using Cash Accounting), again showing net, VAT, gross, and VAT rate. Keep the VAT invoice or valid evidence for each claim.

Bank reconciliation: Match your bookkeeping entries to the bank statements for the period. This helps identify missing invoices, duplicates, or misposted items.

VAT coding: Each transaction should be coded to the correct VAT rate or treatment (standard-rated, reduced-rated, zero-rated, exempt, outside the scope). Incorrect coding is a common reason for incorrect returns.

If your bookkeeping isn’t up to date, don’t jump straight into the VAT return. Bring the records up to date first, reconcile, then review VAT coding. This order matters because it reduces guesswork and prevents you from filing based on incomplete information.

Organise your documents: what you need to keep and why

VAT is evidence-driven. HMRC expects you to hold records that support the figures you submit. For your first VAT return, create a simple checklist of documents to keep organised by period:

Sales invoices issued to customers (including any VAT invoices you must provide).

Credit notes you issued (for returns, discounts, corrections).

Purchase invoices and receipts for expenses where you’re reclaiming VAT.

Import/export documentation if you buy or sell internationally, such as import VAT statements or shipping/commodity evidence where relevant.

Bank statements and payment processor statements (PayPal, Stripe, card terminals), since timing and fees can affect entries.

Notes for unusual items, like a large equipment purchase, a one-off reverse charge service, or a correction to a prior period.

Good organisation isn’t just for compliance. It also speeds up future returns and helps you answer queries quickly if anything is questioned.

Understand VAT rates and categories so you don’t misclassify items

One of the biggest pitfalls for new VAT-registered sole traders is assuming everything is “20% VAT.” In reality, transactions can fall into several categories with very different VAT outcomes:

Standard-rated: VAT charged at the standard rate (commonly 20%). Output VAT applies; input VAT generally reclaimable on associated costs.

Reduced-rated: A lower VAT rate applies (commonly 5%) for certain goods/services.

Zero-rated: VAT rate is 0%. You still record these as VAT-taxable sales, but output VAT is zero.

Exempt: No VAT is charged, and input VAT related to exempt supplies is usually not reclaimable (partial exemption can apply).

Outside the scope: Not part of the UK VAT system (for example, some payments, or certain place-of-supply situations). These are not included as taxable turnover for VAT purposes.

The difference between zero-rated and exempt matters a lot. Both look like “no VAT charged,” but they affect your ability to reclaim input VAT. If your business has anything other than straightforward standard-rated sales, it’s worth spending time verifying the VAT treatment before your first return.

Set up your accounting software and MTD approach early

Most VAT-registered businesses need to comply with Making Tax Digital (MTD) for VAT, which generally means keeping digital records and submitting VAT returns using MTD-compatible software. Practically, this means you should:

Choose a method: Use bookkeeping software that files VAT returns via MTD, or use bridging software if you maintain records in spreadsheets.

Connect to HMRC: Many software packages require you to link your VAT account to HMRC. Do this well before the deadline so you’re not troubleshooting login and authorisation issues at the last minute.

Check your VAT settings: Confirm your VAT scheme, VAT registration date, and VAT reporting periods are set correctly in the software. A wrong start date can pull the wrong transactions into the return.

Lock down your workflow: Decide how you’ll capture receipts, create sales invoices, and record expenses going forward. The first VAT return often exposes weaknesses in how you handle paperwork.

Build your sales side properly: invoicing, VAT invoices, and credit notes

Your VAT return starts with sales, because that’s where output VAT is created. To prepare:

Ensure your invoices are VAT-compliant: VAT invoices generally need specific details such as your VAT number, invoice date, tax point (if different), customer details, description of goods/services, net amount, VAT rate, VAT amount, and gross total. If you’re issuing simplified invoices for smaller amounts, confirm they still meet the rules.

Check invoice numbering: Use a consistent, sequential numbering system. Gaps aren’t automatically wrong, but they should be explainable (voided invoices should be kept and marked as void, not deleted).

Record credit notes properly: If you refund a customer or reduce an invoice, the VAT needs adjusting. Credit notes should be recorded in the correct VAT period based on the relevant dates and scheme rules.

Be careful with deposits and advance payments: Depending on your scheme, VAT can become due when you receive payment or issue an invoice, even if the job isn’t completed yet.

For your first return, it’s common to discover sales were recorded gross instead of net, or that VAT wasn’t applied consistently. Review your top customers and your biggest invoices to confirm VAT treatment is correct.

Build your purchase side properly: reclaiming input VAT without overclaiming

Reclaiming input VAT is where new VAT-registered sole traders can accidentally overclaim (or underclaim). To prepare:

Only reclaim VAT where you have proper evidence: For most purchases, you need a valid VAT invoice addressed to your business (or otherwise meeting requirements). Card receipts alone are not always sufficient if they don’t show the supplier VAT number and VAT breakdown.

Watch out for expenses without reclaimable VAT: Some common costs might be exempt, outside the scope, or include no VAT (for example, certain finance charges, some insurance, and other items depending on nature and supplier). If there is no VAT on the invoice, there’s nothing to reclaim.

Be careful with mixed personal and business use: If a cost is partly personal, you generally should only reclaim the business proportion of VAT. This often applies to mobile phones, home broadband, or vehicle-related costs, depending on how you use them.

Fuel and vehicles can be tricky: VAT on cars is often restricted, and fuel has special rules including potential fuel scale charges if you reclaim VAT and use the vehicle privately. If vehicles are part of your business, check the rules carefully.

Consider timing: Under standard accounting, the invoice date/tax point drives the period; under cash accounting, the payment date matters. Recording a purchase in the wrong period is a classic first-return error.

Handle the “first return” special issue: pre-registration VAT

Many sole traders register for VAT and then realise they bought things before the registration date that they can potentially reclaim VAT on. There are rules that may allow reclaiming VAT on:

Goods still on hand at the time of registration, purchased within a certain look-back period.

Services purchased within a shorter look-back period, if they relate to the business.

To prepare, list any pre-registration purchases you think might qualify (stock, equipment, software subscriptions, professional fees, etc.), find the VAT invoices, and confirm you still have the goods if required. Then decide how to record these in your bookkeeping so they flow correctly into your first VAT return. This step can materially change your first VAT result, especially if you invested in equipment or stock before registering.

Don’t forget “non-obvious” sales and costs: card fees, tips, refunds, and bad debts

VAT preparation isn’t just about invoices and supplier bills. These are commonly missed items:

Payment processor fees: Stripe/PayPal/card terminal fees often include VAT (depending on the service and provider). Record the fee correctly and reclaim VAT if applicable and evidenced.

Marketplace sales: If you sell via platforms, the platform statements may show gross receipts, fees, refunds, and sometimes VAT treatments. Make sure you’re not double-counting sales or missing refunds.

Refunds and chargebacks: If a sale is reversed, the VAT position changes. Ensure your bookkeeping captures these adjustments in the correct period.

Bad debts: If customers don’t pay, there may be VAT bad debt relief rules that apply after certain conditions are met. For a first return, this is less common but possible.

Tips and service charges: How these are handled can affect VAT depending on whether they are discretionary, how they’re collected, and whether they form part of the consideration for the supply.

These items are easier to handle if you reconcile to bank and processor statements, rather than relying solely on invoices.

International transactions: check place of supply and reverse charge rules

If you buy services from overseas suppliers (for example, software subscriptions, advertising platforms, design services), UK VAT may be due under the reverse charge mechanism, depending on the place of supply rules. This can affect both output and input VAT boxes even if no money changes hands in the UK VAT sense.

Similarly, if you sell to customers outside the UK or supply digital services, VAT treatment can vary. If your business has any cross-border elements, your first VAT return preparation should include a review of:

Supplier location and invoice VAT treatment (was VAT charged? which country?).

Customer location and whether you’re selling goods or services.

Evidence supporting the VAT treatment (particularly for exports or international supplies).

International VAT issues can get complex quickly. If your first return includes cross-border sales or purchases and you’re not confident, it’s sensible to get tailored advice rather than guessing.

Do a “VAT sense check” before you generate the return

Before you look at the software’s VAT return screen, do a high-level reasonableness check. This is a simple but powerful step:

Estimate your output VAT: Roughly, if most of your sales are standard-rated, output VAT should be close to one-sixth of your gross VAT-inclusive sales (because 20% VAT on net equals 1/6 of the gross). This isn’t exact if you have mixed rates, but it gives you a ballpark.

Estimate your input VAT: Look at your biggest cost categories. If your expenses include lots of VAT-free items (rent can be VAT-exempt unless opted to tax, insurance is typically exempt, many financial services are exempt), input VAT may be lower than you expect. If you think you paid “loads of VAT” but your invoices don’t show it, the reclaim won’t appear.

Compare to cashflow: If you’re about to pay a surprisingly large VAT bill, check whether you’ve been setting aside the VAT portion of customer payments. Many first-time VAT filers accidentally spend the VAT and then struggle when the payment date arrives.

A sense check doesn’t replace detailed review, but it helps you spot glaring problems early, like sales coded as zero-rated when they should be standard-rated.

Generate the draft VAT return and review each box carefully

When your bookkeeping is up to date and reconciled, generate a draft VAT return in your software and examine each box. While the precise box numbers and reporting may vary by context, the key is to understand what’s driving each figure and whether it matches your expectations.

As you review:

Drill down to transactions: Most software lets you click a VAT box total and see the underlying transactions. Use this to find miscodings, duplicates, or missing invoices.

Look for outliers: Very large VAT amounts on a single transaction might be correct (a big equipment purchase), but they deserve a second look.

Check for negative values: Negative VAT can arise from credit notes and refunds. Verify these are legitimate and recorded in the correct period.

Check the VAT rates list: If you see transactions coded to odd rates or “unknown,” investigate. These often come from imported bank transactions without VAT detail.

Common first-return mistakes (and how to avoid them)

Your first VAT return is more error-prone because you’re still building habits. Here are frequent mistakes and the practical fix for each:

Mistake: Recording sales gross as net (or net as gross)

Fix: Confirm whether your bookkeeping software expects net amounts on invoices and then calculates VAT, or whether you’re entering gross figures. For bank-imported sales entries, ensure you’re not adding VAT twice.

Mistake: Reclaiming VAT without a valid VAT invoice

Fix: For each input VAT claim above a sensible threshold, verify you have the VAT invoice and it shows the VAT breakdown and supplier VAT number.

Mistake: Missing credit notes or refunds

Fix: Reconcile sales receipts and payment processor statements; match refunds to credit notes; ensure they’re dated correctly.

Mistake: Incorrect VAT coding on expenses

Fix: Review VAT codes on common categories (travel, meals, software, professional fees). Don’t assume; check invoices.

Mistake: Using the wrong period

Fix: Confirm your VAT period dates and scheme. Under cash accounting, payment date is key; under standard accounting, invoice date/tax point is key.

Mistake: Forgetting pre-registration VAT rules

Fix: Make a pre-registration list and include qualifying items properly, with invoices retained.

Mistake: Confusing zero-rated with exempt

Fix: Verify which of your supplies are actually taxable at 0% versus exempt. This can affect input VAT reclaim.

Plan for payment: VAT is not “extra money”

A mental shift helps: output VAT you collect from customers is not your income. It’s tax you’re holding to pay over to HMRC. Many sole traders get caught out because their bank balance looks healthy until the VAT bill arrives.

Practical ways to prepare:

Separate the VAT: Transfer the VAT element of each customer payment into a separate savings account. Even if you don’t do it perfectly, building the habit reduces surprises.

Forecast: After month one and two of your quarter, estimate your likely VAT bill and adjust spending accordingly.

Keep a buffer: VAT bills can fluctuate if you have a strong sales month late in the quarter. A buffer helps avoid cashflow stress.

If your first return results in a payment you can’t make, address it immediately rather than ignoring it. There may be options for arranging payment, but waiting tends to reduce your choices.

Final checks before you submit

Right before submitting your first VAT return, do these last checks:

Re-run bank reconciliation: Make sure nothing new has been imported or changed since your last review.

Lock the period: If your software allows you to lock the VAT period, do so after finalising to prevent accidental changes to filed figures.

Review large and unusual transactions: Confirm VAT treatment and supporting documents.

Check for duplicated entries: Duplicates often arise when you both enter an invoice and import the bank transaction as another expense entry.

Confirm you’re filing the correct period: It sounds basic, but it’s a real-world mistake—especially for your first return when dates are unfamiliar.

Submitting the VAT return and keeping proof

When you submit, keep evidence of what you filed and when. Your accounting software will often store a submission receipt or confirmation. Also save a PDF or export of the VAT return summary and the detailed VAT audit report (the list of transactions behind the totals) for that period.

Good record-keeping means that if you need to revisit the period later—for example, if you spot an error, get an HMRC query, or change accountants—you can quickly see exactly what was included.

What to do if you find a mistake after filing

It’s common to notice something after your first submission. The correct approach depends on the size and nature of the error and the rules for correcting VAT returns. Often, small errors can be corrected on a later return, while larger or certain types of errors may need a different correction process.

If you find a mistake:

Identify the transaction and what VAT treatment should have been.

Quantify the impact on output VAT and input VAT.

Document the reason for the correction and keep the evidence.

Apply the correction properly using your software’s VAT adjustment features, rather than just editing old transactions after filing without a clear audit trail.

For material mistakes or anything complex (like partial exemption or international VAT), professional advice can save you from compounding the issue.

Set yourself up for easier future VAT returns

The best outcome of your first VAT return is not just “it’s done,” but “the next one will be easier.” Build a lightweight routine:

Weekly admin slot: Spend 15–30 minutes each week capturing receipts, raising invoices, and categorising expenses.

Monthly reconciliation: Reconcile the bank account and payment processors monthly rather than waiting for quarter end.

VAT review checklist: Keep a checklist of your common tricky areas (fuel, overseas software, refunds, prepayments) and review them each period.

Document your VAT decisions: If you decide a particular supply is zero-rated or outside the scope, write down why and keep supporting evidence. This prevents repeated research and helps if you ever need to justify the treatment.

When it’s worth getting help

Many sole traders can handle VAT returns themselves with good software and tidy records. But getting help can be worthwhile if:

You have mixed VAT rates, exempt income, or partial exemption issues.

You buy or sell internationally, especially services with reverse charge complications.

You are on the Flat Rate Scheme and unsure about your correct category or whether the limited cost trader rules apply to you.

You have high-value purchases, property-related costs, or anything where VAT is frequently restricted or treated differently.

You’re behind on bookkeeping and need a clean-up to avoid filing incorrect returns.

A short session with an accountant or VAT adviser can be cheaper than the time and stress of trying to untangle mistakes later.

A simple step-by-step checklist for your first VAT return

If you want a practical sequence, here’s a straightforward checklist you can follow:

Step 1: Confirm your VAT scheme and VAT period dates.

Step 2: Update bookkeeping for the full period (sales invoices, purchase invoices, expenses, credit notes).

Step 3: Reconcile bank and payment processors to ensure completeness.

Step 4: Review VAT coding for common categories and anything unusual.

Step 5: Identify pre-registration VAT claims and record qualifying items correctly.

Step 6: Generate a draft VAT return and drill down into each VAT box total.

Step 7: Sense check the result against turnover and expected VAT.

Step 8: Make corrections, re-run the draft, and repeat the review.

Step 9: Submit via MTD-compatible software and save confirmation/audit reports.

Step 10: Pay on time (and set reminders for the next period).

Closing thoughts: aim for consistency, not perfection

Your first VAT return is a learning experience. You’re building a system, not just completing a form. If you focus on keeping records tidy, reconciling regularly, and understanding the few VAT areas that apply to your business, you’ll quickly move from uncertainty to routine.

The key is to prepare early: keep your documents organised, make sure your software is set up correctly, and give yourself time for review before the deadline. Do that, and your first VAT return becomes less of a looming event and more like a repeatable monthly or quarterly habit—one that supports your business rather than distracting from it.