7 Common VAT Mistakes You Should Avoid

Filing VAT returns can be daunting for many businesses and often leads to various VAT problems with significant financial repercussions. Mistakes in the process, commonly referred to as common VAT mistakes, can result in hefty fines and prompt HMRC investigations.

To help you navigate the complexities of VAT, here’s a detailed list of 7 common VAT mistakes businesses often make and how to steer clear of them.

1. Entering the Wrong Amount

One of the most common errors that HMRC detects involves incorrect entries in Box 6 of the VAT return. For businesses using the flat rate scheme, Box 6 should reflect gross income. In contrast, those utilizing the cash accounting scheme should display net income.

For example, if your VAT-inclusive income is £48,000 and your net income is £40,000:

• Flat rate scheme: Enter £48,000 in Box 6.
• Cash accounting scheme: Enter £40,000 in Box 6.

Mistakes in this area can lead to significant VAT problems, as incorrect amounts can trigger audits. To ensure accuracy, consult a tax investigation specialist if you’re unsure about which scheme to use.

2. Misunderstanding Limited Cost Trader Rules

Many businesses make errors regarding the limited-cost trader rule, which can lead to costly mistakes. Introduced on 1 April 2017, this rule increased the flat rate for many service-based businesses to 16.5%.

A limited cost trader qualifies if VAT-inclusive expenses meet one of these criteria:

• Greater than 2% of VAT-inclusive turnover but less than £1,000 per year
• Less than 2% of VAT-inclusive turnover in a year

Business owners often overlook these nuances, leading to VAT mistakes that could have been avoided. Remember that expenses must be directly business-related and cannot include capital expenditures, fuel, vehicles, or employee meals.

For guidance, seek advice from a qualified accountant who can help you understand your specific situation.

3. Mistakes with Import VAT Recovery

Many businesses encounter VAT problems when recovering import VAT. Often, they incorrectly attempt to reclaim VAT based on invoices from import agents or freight forwarders. However, HMRC only permits VAT claims based on the official C79 certificate or Monthly Import VAT Certificate.

Always be cautious: an import agent’s invoice does not qualify as a VAT invoice for claiming purposes. Understanding the proper documentation required for VAT recovery can help you avoid costly VAT mistakes that complicate your accounting processes.

4. Misapplying Zero Rates for EU Clients

Another frequent VAT mistake involves incorrectly applying zero-rating to sales. VAT zero-rating applies only to certain EU-based businesses that are registered for VAT. To ensure compliance and avoid penalties, consult your tax specialist about the correct application of zero rates.

Businesses often misinterpret what qualifies for zero-rating, leading to further complications. Clarifying these rules can save you from potential audits and fines.

5. Entertainment Expenses

While businesses can claim VAT on expenses incurred for entertaining clients, they face restrictions. Claiming VAT on non-business entertainment or employee events may not be permissible, and misuse can trigger penalties. For specific advice on what you can claim, consult a VAT specialist.

Understanding the boundaries of entertainment expenses is crucial for maintaining compliance and avoiding unnecessary scrutiny from HMRC.

6. Ignoring VAT on Unpaid Supplier Invoices

If you’ve recovered VAT on supplier invoices but haven’t paid the supplier for over six months, you must repay the VAT to HMRC. Additionally, if a customer has an outstanding payment to you for more than six months, you can claim VAT back from HMRC.

Monitoring these invoices closely helps avoid VAT mistakes that impact your cash flow and financial planning. Keeping meticulous records of outstanding payments and reconciling them regularly is essential for smooth operations.

7. Confusion with Business Use of Private Premises

Claiming VAT on mixed-use expenses, such as broadband or vehicle costs, can lead to errors. Claim VAT only on the business-use portion when items serve both business and personal purposes.

For instance, if you use your home broadband for both personal and business use, you can only claim the portion used for business. Properly documenting and apportioning these expenses is vital to avoid claims that can result in VAT problems.

Conclusion

For significant VAT errors those exceeding £50,000 or involving intentional misreporting you must report directly to HMRC using form VAT652 online. Minor errors can be adjusted in your current VAT return.

To ensure accurate VAT filings and avoid penalties associated with common VAT mistakes, consider consulting chartered accountants in Wimbledon or throughout the UK. Their expertise can provide invaluable support in navigating the complexities of VAT, ensuring compliance and peace of mind.