Common VAT return mistakes small businesses should know
1. Not registering for VAT at the right time
2. Not keeping accurate VAT records
3. Not putting aside money for VAT
VAT is essentially a tax collected from your customers on behalf of HMRC. When you make a sale, the price you charge typically includes VAT. This VAT amount is not a profit for your business; it’s money you owe to the government.
Failing to set aside funds specifically for VAT payments can cause real problems for you. When your VAT return is due, you might not have the necessary funds to pay HMRC, potentially resulting in late payment penalties and interest charges. Unexpected VAT payments can disrupt your cash flow, making it harder to cover other business expenses like salaries, rent, and supplier payments.
4. Not applying the fuel scale charge
If your business uses vehicles for work purposes and claims input VAT (the VAT you paid on fuel costs), you can’t reclaim VAT on the portion of fuel used for private purposes. The fuel scale charge is a complex calculation that helps determine the business and private use of your vehicles.
Not applying the fuel scale charge accurately can lead to you claiming more VAT than you’re entitled to. Incorrectly applying the fuel scale charge can trigger an HMRC investigation, potentially resulting in penalties and interest charges.
Subscribe to our newsletter
5. Not reporting VAT on deposits or advance payments
When you receive a deposit or advance payment from a customer, it often includes VAT. Even if you haven’t yet supplied the goods or services, you’re still responsible for accounting for the VAT received on that deposit or advance payment in your VAT return.
Failing to report VAT on deposits or advance payments will lead to your total VAT liability being underreported. HMRC may impose penalties for underreporting VAT, even if it was unintentional.
6. Reclaiming VAT input tax without a purchase invoice
aYou must have a valid purchase invoice to reclaim input VAT (the VAT you paid on business expenses). This invoice must include essential information like:
- Supplier’s name and VAT number
- Date of the purchase
- Description of the goods or services
- Net price (price before VAT)
- VAT amount
HMRC will likely disallow your claim for input VAT without a proper invoice. Not being able to reclaim input VAT increases your overall business costs.
7. Claiming VAT incorrectly on insurance and business rates
Most insurance premiums are exempt from VAT. This means you cannot reclaim the VAT you paid on your insurance policies. Business rates are a tax levied by local authorities on non-domestic properties. They are not subject to VAT.
If you mistakenly claim input VAT on insurance premiums or business rates, you’re essentially overclaiming from HMRC. Incorrect claims can trigger an HMRC investigation into your VAT records, which can be time-consuming and stressful. HMRC can charge penalties and interest if you claim too much VAT.
8. Reclaiming VAT on expenses with private use
9. Not accounting for VAT when selling a business asset
When you sell a business asset, like a computer or office furniture, you need to include VAT on the sale amount. If you purchased the asset with VAT, you may be able to reclaim some or all of the input VAT. If you purchased the asset from a non VAT registered supplier, you’ll still need to charge VAT on the sale if you are VAT registered.
Failing to account for VAT on the sale of a business asset can lead to errors in your VAT return. Incorrect VAT reporting on asset sales can result in penalties from HMRC.
10. Not applying the 50% VAT input restriction on company car leases
Consequences of VAT return mistakes
Making mistakes on your VAT return can have serious consequences. These can include:
- Penalties: HMRC can impose penalties for late filing or inaccurate VAT returns.
- Interest charges: You may be charged interest on any unpaid VAT.
- Disputes with HMRC: Incorrect VAT returns can lead to disputes with HMRC, which can be time-consuming and stressful.
- Reputational damage: If your business is found to be non-compliant with VAT regulations, it can damage your reputation.
Tips to avoid VAT return mistakes
- Seek professional advice: If you’re unsure about any aspect of VAT, consider consulting with a qualified accountant or VAT advisor. They can provide guidance specific to your business.
- Stay informed: VAT rules and regulations can change periodically. Stay updated on the latest VAT rules to ensure you’re compliant.
- Utilise accounting software: Accounting software can assist you in automating VAT calculations and maintaining records, minimising the chances of mistakes.
- File your VAT returns on time: Make sure to submit your VAT returns on time to steer clear of penalties for late filing.
- Conduct regular VAT health checks: Review your VAT procedures periodically to identify and correct potential issues.
Conclusion
