Why Is the VAT Balance on the Balance Sheet Different to My VAT Return?

Your VAT balance on the balance sheet rarely matches the figure on your latest VAT return, and in most cases that is completely normal. The balance sheet shows the total VAT you owe (or are owed) at one exact date, while a VAT return only covers one completed quarter. Add in the VAT you have racked up since that quarter closed, plus the timing effects of cash accounting, and the two numbers almost never line up to the penny.

So a difference is not, by itself, a red flag. What matters is being able to explain the difference. Here is what sits behind it.

The VAT figure on your balance sheet is the balance of your VAT control account, sometimes labelled “VAT liability” or “VAT payable”. It is a running total that nets off two things:

• Output VAT, the VAT you have charged your customers on sales.
• Input VAT, the VAT you have paid your suppliers on purchases and expenses, which you can reclaim.

When people search for “input VAT and output VAT in the balance sheet”, this is what they are looking at. The control account collects both sides and shows the net position: a liability if you owe HMRC, or an asset (a debtor) if you are due a refund because your input VAT is higher than your output VAT.

Crucially, this account keeps ticking over every single day you raise a sales invoice or record a purchase. Your VAT return, by contrast, is a snapshot of one closed period. The two are measuring different windows of time, which is the single biggest reason the numbers differ.

There are usually three reasons the VAT liability on your balance sheet differs from the return you just filed:

1. The current, unfiled period. As soon as one VAT quarter ends and you file it, a new quarter starts accumulating VAT. By the time you look at the balance sheet, it already includes weeks of VAT that won’t be reported until the next return. So the balance is normally higher than the last return you submitted.
2. Timing of the return itself. If the last day of your accounting period doesn’t line up exactly with your VAT quarter end, the numbers won’t tie up. On the accrual (invoice) accounting method they would technically match if the dates coincided and every transaction were posted, but in practice that alignment is rare.
3. Payment not yet cleared. If you have filed a return but not yet paid HMRC (or not yet received a refund), that amount still sits on the balance sheet as an outstanding liability or asset.

None of these are errors. They are just the accounting doing its job.

If you use the VAT Cash Accounting Scheme, expect a permanent gap. Under this scheme you account for VAT based on when money actually changes hands, not when you raise or receive an invoice. So your VAT return reflects cash paid and received, while your accounts (and the sales and purchase ledgers feeding the balance sheet) are still built on invoice dates.

The result is a standing difference driven by your unpaid sales invoices and unpaid bills. You can join the Cash Accounting Scheme if your estimated VAT taxable turnover is £1.35 million or less over the next 12 months, and you must leave it once turnover exceeds £1.6 million.

This one trips people up. In some accounting systems (Sage, for example) you’ll see both a VAT control account and a VAT suspense account:

• The VAT control account holds the live, running VAT from your day-to-day transactions.
• The VAT suspense account is where the amount of a filed return is parked while you wait to pay HMRC or receive your refund. When you run your VAT return, the software moves the reported figure out of the control account and into suspense; when you settle up with HMRC, the payment clears the suspense account.

So a healthy control account should broadly equal the VAT built up since your last return, and suspense should equal what you still owe or are owed from the return you filed.

Although the two numbers rarely match, you should still check they reconcile, that every part of the difference is explainable. A quick reconciliation looks like:

1. Take the VAT control balance at your period end.
2. Deduct the VAT reported on returns not yet paid (this should sit in suspense).
3. What’s left should reflect the VAT accrued in the current, open period.
4. Investigate anything that doesn’t fit, late-posted invoices, manual journals, or transactions coded to the wrong VAT rate.

An unexplained gap can be an early warning of a genuine problem: duplicated invoices, VAT posted to the wrong period, or a rate applied incorrectly. HMRC will spot a shortfall soon enough, so it pays to find and fix errors first. If you’d like a second pair of eyes on the numbers, our outsourced finance and advisory support can review your VAT position and keep it clean quarter after quarter.

If your VAT numbers never seem to tie up and you’re not sure whether it’s a timing quirk or a real problem, we can help. FD Works provides outsourced finance and part-time FD support to growing UK businesses, call us on 01454 300 999 or email [email protected].