Would you rather someone else handled this? Our VAT returns service means we prepare and file every quarter, Making Tax Digital ready.
This case study is based on genuine client work carried out by our practice. Names, figures and identifying details have been changed to protect confidentiality, and the numbers shown are representative of the situation rather than the exact amounts. Your own position will differ.
The scenario
A VAT registered business has been submitting returns using figures pulled together from bank statements at the last minute each quarter. Nobody has reconciled anything. The returns get filed, the payments get made, and everyone moves on.
Then HMRC opens a compliance check, and the question is simple: show us how you arrived at these numbers.
Why estimated returns are a real problem
A VAT return is a declaration. Filing figures you cannot evidence is not a technicality, it is filing a return you cannot support.
When HMRC asks for the underlying records and there are none, they are entitled to raise an assessment based on their own best judgement. That assessment stands unless you can displace it with actual records, which is difficult when the reason you are in the position is that you do not have any.
Penalties then depend on behaviour, and this is where it matters enormously. A careless error attracts a lower penalty than a deliberate one, and an unprompted disclosure attracts a far lower penalty than one dragged out of you after HMRC came knocking. The same underlying error can cost very different amounts depending entirely on how it comes to light.
What goes wrong with bank-based VAT
Working from the bank rather than from invoices produces predictable errors in both directions.
You reclaim VAT you cannot reclaim. Not every payment out has VAT on it. Insurance, wages, most bank charges, many rents, postage. Reclaiming a twentieth of every payment because it looks about right is simply wrong.
You reclaim without a VAT invoice. A bank payment is not evidence of input tax. You need the invoice showing the supplier VAT number.
Timing goes wrong. Unless you are on cash accounting, VAT follows the tax point, not when the money moved. Bank based figures put things in the wrong quarter as a matter of course.
Errors get missed entirely. Nobody spots a duplicated invoice or a missing sale if nothing is ever reconciled.
The approach we would take
Reconstruct properly, quarter by quarter, from invoices rather than the bank, and find out what the real position is before anyone else does.
If there are errors, disclose them. Under £10,000, or under 1% of turnover up to £50,000, errors can usually be corrected on the next return. Above that they need a separate disclosure. Getting in first is worth real money in reduced penalties.
Then fix the process, because a compliance check on a business that has since put proper records in place is a very different conversation from one that has not.
The point of this example
Since April 2026 this matters more, not less. Making Tax Digital means the records have to be digital and the links between them have to be there. The era of estimating a VAT return from the bank in twenty minutes is closing.
If your VAT returns are estimates and you would rather find that out on your own terms, get in touch.
What the rules actually required
Cases like this one turn on three obligations, and it is worth setting them out plainly because they are where the cost came from.
Digital records. Every VAT registered business must keep VAT records digitally, whatever its turnover. That means the time of supply, the value and the VAT rate for sales, and equivalent detail for purchases, held in software rather than reconstructed later.
Digital links. Where figures move between programs, they must move by digital link. A formula between spreadsheet cells counts. An import counts. Copy and paste does not, and retyping does not. The soft landing for this ended for VAT periods starting on or after 1 April 2021.
Filing from software. Returns must be submitted through compatible software using HMRC's interface, not typed into the HMRC website.
What poor records actually cost
The penalties are not the whole of it, but they are the part people underestimate.
- Up to £400 per return filed without functional compatible software.
- £5 to £15 a day for failing to keep digital records, and again for failing to use digital links.
- Late returns work on points. One per late return, and for a quarterly filer a £200 penalty at 4 points, then £200 for each further one.
- Late payment: 3% at day 15, a further 3% at day 30, then 10% a year accruing daily from day 31, with interest at 7.75% on top.
The larger cost is usually the input VAT that cannot be recovered. Without a valid VAT invoice showing the supplier's VAT number and the VAT charged, a claim is unsupported. A bank statement line is not a VAT invoice, and on a compliance check those claims come out.
The part that is hardest to price
Reconstruction. Rebuilding a year of records from bank statements takes far longer than keeping them would have done, and it is never complete. Cash purchases vanish. Small supplier invoices cannot be obtained two years later. Every gap is either a disallowed claim or an estimate that will not stand up.
Businesses in this position routinely pay more in professional fees to rebuild the records than they would have paid to keep them properly in the first place, and still end up claiming less.
What good looks like instead
- A separate business bank account, so every transaction has a business purpose by default.
- Monthly reconciliation, so nothing is unexplained and errors are caught while they are still memorable.
- Receipts captured at the point of purchase, photographed and attached to the transaction in the software.
- VAT set aside in a separate account as it is collected, so the quarter end is a transfer rather than a crisis.
- A rolling 12 month turnover check every month, so the £90,000 registration threshold never arrives as a surprise.
If you are already behind
Do not wait for the deadline. Two things reduce the damage substantially. File, using best estimates and flagging them as provisional if you must, because late filing penalties run independently of whether you can pay. And talk to HMRC about Time to Pay, because agreeing an arrangement, or even proposing one within the window, stops the late payment penalty clock. Interest continues, but the percentage charges do not land.
Coming forward voluntarily is also treated far more favourably than being found. That principle runs through the whole penalty regime and it is worth acting on.
Worried your VAT records will not stand up?
We rebuild your records digitally, review past returns, reclaim what you have missed, and keep every return compliant, so an inspection holds no fear.