7 Common VAT Mistakes Small Businesses Make and How to Avoid Them
The most common VAT mistakes small businesses make include registering late, charging the wrong VAT rate, reclaiming VAT without proper evidence, missing deadlines, keeping incomplete records and handling overseas transactions incorrectly. These errors can lead to unexpected VAT bills, interest, penalties and extra attention from HMRC. Most of them are preventable when the right checks are built into your bookkeeping and VAT return process. This guide explains the VAT mistakes UK small businesses make most often, how HMRC deals with errors and what you can do to stay compliant. Why VAT Mistakes Are So Common VAT can look simple at first. A business charges VAT on sales, reclaims eligible VAT on purchases and reports the difference to HMRC. The difficulty is in the detail. Different goods and services can have different VAT treatments. Some sales are standard rated, some are reduced rated, some are zero rated and others are exempt. The rules can also change depending on where the customer is based, when the invoice was issued and which VAT scheme the business uses. Small business owners often manage VAT alongside sales, payroll, customer work and day to day administration. When records are updated only near the filing deadline, small errors are more likely to be missed. The Most Common VAT Mistakes Small Businesses Make 1. Registering for VAT Too Late A business must normally register for VAT when its taxable turnover goes above £90,000 during any rolling 12 month period. It must also register if it expects taxable turnover to exceed £90,000 during the next 30 days. The rolling test is where many businesses go wrong. It does not follow the tax year, calendar year or company accounting year. You need to look back over the previous 12 months at the end of every month. Our guide to the VAT registration threshold explains how the rolling test works. HMRC also sets out the official rules on when a business must register for VAT. If you have already crossed the threshold, you normally need to register within 30 days of the end of the month in which you exceeded it. Late registration can mean paying VAT on sales made from the date you should have been registered, even if you did not charge the customer VAT at the time. A penalty may also apply. 2. Applying the Wrong VAT Rate The standard VAT rate is 20%, but it does not apply to every sale. Some goods and services are charged at 5%, some at 0% and some are exempt from VAT. Zero rated and exempt sales are not the same. Zero rated sales are still taxable supplies and usually count towards the VAT registration threshold. Exempt sales generally do not count as taxable turnover and can restrict the VAT a business is allowed to reclaim. Food and drink is a common area of confusion because the treatment can depend on what is sold, how it is served and where it is consumed. Our guide to VAT on food and drink covers several of these situations. Before charging VAT, check the official VAT rates for different goods and services. Do not rely only on how a similar business treats the same product. 3. Reclaiming VAT on Purchases That Do Not Qualify A VAT registered business can usually reclaim VAT on purchases used for its taxable business activities. That does not mean every VAT amount shown on a receipt can be claimed. VAT normally cannot be reclaimed on items used only for personal purposes, client entertainment or purchases connected with exempt supplies. Where something has both business and private use, only the business element may be recoverable. Businesses also make mistakes when staff expenses, vehicle costs, subscriptions and mixed use purchases are entered without checking the VAT rules. HMRC provides guidance on which business expenses qualify for VAT recovery. A regular review of expense categories can prevent the same incorrect claim from being repeated on several returns. 4. Claiming VAT Without a Valid Invoice A bank payment, card statement, order confirmation or delivery note does not automatically give a business the right to reclaim VAT. HMRC normally expects the business to hold a valid VAT invoice containing the required information. If the invoice is incorrect, missing or issued by a supplier that is not VAT registered, the claim may be challenged. The invoice date and tax point also affect which VAT period the transaction belongs to. Recording a purchase or sale in the wrong period can move VAT between returns and create a mismatch during an HMRC check. Good small business bookkeeping should include a process for checking supplier invoices, VAT numbers, invoice dates and the VAT amount before a transaction is posted. 5. Missing the VAT Return or Payment Deadline For most businesses, the VAT return and payment deadline is one calendar month and seven days after the end of the VAT accounting period. A late VAT return does not always create an immediate financial penalty. HMRC first gives a penalty point for each late return. A £200 penalty applies when the business reaches its points threshold. The threshold is normally two points for annual returns, four for quarterly returns and five for monthly returns. Late payment is handled separately. Interest normally starts from the first day the VAT payment is overdue. A late payment penalty can apply once the payment is at least 16 days late, with higher penalties where the amount remains unpaid for longer. You can use our HMRC tax deadline calendar to keep track of important dates. HMRC also explains the VAT late submission penalty system. Set reminders before the deadline and make sure the payment reaches HMRC on time. Submitting the return on the due date but paying late can still create interest and penalties. 6. Keeping Poor Records or Ignoring Making Tax Digital VAT registered businesses are generally required to keep certain VAT records digitally and submit returns through compatible software unless HMRC has granted an exemption. Keeping figures in disconnected spreadsheets, copying totals
