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HM Revenue & Customs (HMRC) has clear rules for UK businesses that charge VAT. You need to use the right VAT rates, keep proper records, submit returns on time, and follow Making Tax Digital requirements. For busy business owners, keeping track of all these details can sometimes lead to simple VAT mistakes.
Getting these details wrong can cost your business money. Depending on the mistake, you could face penalties, interest, an incorrect VAT bill, or extra work to correct your records and returns. Repeated errors may also lead to closer attention from HMRC.
Keep reading to learn about five common VAT mistakes and how you can avoid them.
1) Missing the VAT Registration Deadline
One of the first things to get right is knowing when your business needs to register for VAT. The current UK VAT registration threshold is £90,000 in taxable turnover.
If your taxable turnover exceeds this amount over a rolling 12-month period, you must normally register within 30 days of the end of the month in which you crossed the threshold.
There’s also a separate rule if you expect your taxable turnover to exceed £90,000 in the next 30 days alone. If that happens, you must notify HMRC before the end of those 30 days. Your registration takes effect from the date you first expected to exceed the threshold.
Missing these deadlines could leave you owing VAT on sales made before you registered, along with potential penalties. Keep an eye on your taxable turnover throughout the year. Checking it monthly can help you spot when you’re approaching the threshold and give you time to prepare.
2) Using the Wrong VAT Rate
VAT isn’t always charged at the standard rate. The standard UK VAT rate is 20%, while some goods and services qualify for a reduced 5% rate or a zero rate. Some supplies are also exempt from VAT, which is different from being zero-rated.
This can make VAT calculations confusing, particularly if your business sells different products or services. Applying 20% to everything without checking the correct treatment can leave you charging customers too much or too little VAT.
Check the VAT treatment of each type of product or service you sell. It’s also worth reviewing your accounting software settings when you introduce a new product, change your services, or start working with a different type of customer.
3) Claiming VAT on the Wrong Expenses
Being VAT registered doesn’t mean you can reclaim VAT on every business purchase. Generally, you can only reclaim VAT on expenses used for your taxable business activities, and some purchases have specific restrictions. If an expense is partly for personal use, you may only be able to reclaim the business portion.
Make sure to keep receipts and invoices for your business purchases and check the VAT amount before adding it to your return. You must also have valid VAT invoices to support most VAT reclaims.
If you’re unsure about an expense, check its VAT treatment before claiming it. Correcting an incorrect claim later can take time and may leave you owing money to HMRC.
4) Keeping Proper VAT Invoices and Records
A full VAT invoice must include certain details, including a unique invoice number, relevant dates, supplier and customer information, a description of the goods or services, and a breakdown of the amounts and VAT charged. If an invoice is missing important details, it may not provide enough evidence for the input VAT you are trying to reclaim.
This is especially important if HMRC asks questions about your VAT records. VAT inspections can involve checking invoices, accounts, VAT calculations, and other records, so having your paperwork in good order can make the process easier.
Create a simple system for storing invoices as soon as you receive them. Digital copies are useful, but make sure they remain accessible and organised so you can find a particular transaction.
5) Getting Making Tax Digital Rules Wrong
Making Tax Digital for VAT has changed how VAT-registered businesses keep records and submit returns. VAT-registered businesses must use compatible software to maintain their digital VAT records and file VAT returns with HMRC.
Problems can arise when a business uses several pieces of software that aren’t properly connected. Under MTD rules, information transferred between systems used to maintain digital VAT records generally needs to move through digital links. Manually copying and pasting figures between those systems won’t meet the requirements.
Review how your sales, purchases, bookkeeping software, spreadsheets, and VAT submission software work together. If you’re manually transferring VAT figures between different software systems, check whether your setup meets the MTD digital link requirements.
Keeping VAT Simple
VAT becomes easier to manage when you stay on top of it throughout the year. Check your turnover regularly, use the correct VAT rates, review expenses before claiming input VAT, and keep your invoices and records organised.
Your accounting software can also take care of routine calculations, but you still need to check that the information going into the system is correct. A software package can’t tell you that you’ve chosen the wrong VAT treatment for a particular sale or expense.
If you’re unsure about a VAT rule or how to record a particular transaction, it’s worth checking with HMRC or speaking to an accountant before submitting your return. It’s usually easier to get something right the first time than to correct it later.