Tips For Calculating Your VAT Liability To Avoid Overpaying Or Underpaying

VAT, also known as Value Added Tax, is a form of indirect tax implemented on goods and services. However, the term is often mixed up with VAT liability. It should be noted that both have considerable differences, a VAT liability is what you need to pay to the authorities. It only applies to you if you are VAT-registered. 

Additionally, you need to register yourself through some steps before paying VAT liability. With paying VAT liability, overpaying or underpaying is always a concern. To ensure that you avoid either of these cases, you will first need to start by understanding VAT liability and how you can calculate it. 

What is VAT Liability?

VAT liability exists when you must pay money owed to the HMRC or HM Revenue and Customs authority. VAT liability is different from other taxes. Before paying your VAT liability, you must calculate it carefully to avoid overpaying or underpaying it. 

But why is it such a big concern? If you overpay or underpay your VAT by any measure, you will be charged interest by HMRC. However, if HMRC makes a mistake by claiming too much VAT from you, you can claim interest from the other side. 

Similarly, if you underpay your VAT, you will be paying an interest of 6.75%; if you overpay, you cannot claim any interest. 

On this note, it is always better not to underpay or overpay in any condition. 

How to Calculate VAT Liability?

You can calculate VAT liability by computing the total amount of VAT collected and then deducting it with VAT credits. Since value-added tax liabilities are also called value-added tax obligations, it does not only consist of paying the rate but also include VAT returns. 

Submission of VAT Returns by Businesses

You must submit VAT returns if you are already registered under VAT or considering registering your business. You must submit your VAT returns every three months, known as your accounting period. Further, you need to submit some important information as directed by HMRC. The information includes the following: 

  • Amount of VAT refund from the HMRC.
  • Amount of VAT that your business can reclaim.
  • Amount of VAT that your business owes.
  • Total purchases and sales from the accounting period. 

Even upon calculation, if you find out that your business does not owe any VAT, you still need to submit the VAT return. Generally, you can submit a VAT return simplified within a given time and find your deadline using the online VAT account. 

If the HMRC does not receive a VAT return by the deadline, your business will be subjected to surcharges and penalties. 

Tips to Consider for Calculating VAT Liability 

When you are calculating your VAT liability, there are many tips that you must consider. These tips can include the following: 

  • When calculating your VAT liability, you must consider every input and output of your business. 
  • You will need to focus on the output VAT and input VAT. The output VAT consists of the tax charged on the selling price of your goods. And the input VAT is charged on your purchases or the cost price of the goods. 
  • Your calculation of VAT liability will decide the amount you need to pay. And if you miscalculate, you can end up overpaying or underpaying.  
  • After you or your finance team has calculated the VAT liability, you can check its accuracy using an online calculator or software. It will ensure that you are paying the right amount. 
  • You can calculate your VAT liability quickly by following the liability rate and understanding the calculation rules. 
  • Once you make your VAT liability driven from your calculation, you can keep a record of each transaction. Your previous VAT transactions will make it easier to calculate your VAT liability the next time and prepare your VAT returns. 

The tips provided above are some common points you can consider. However, depending on your business, you can also take extra care in ascertaining that you are considering the right tax rate and following the right strategy to calculate your VAT liability. 


VAT liability is a crucial tax you must pay to the HMRC on time. You must follow guidelines stringently concerning overpaying or underpaying. And if either occurs, you must consider the penalty your business will have to pay. VAT liability is important, but VAT returns are equally significant. Thus, if you do not want to pay the extra charges, you must file VAT returns on time.