Value-Added Tax (VAT) is a tax put on goods and services at every stage of the supply chain. Although the final burden to pay falls on the end consumer, businesses within the supply chain are tasked with collecting the tax from their customers for the government. Each business pays the difference between the VAT it has charged on sales (output tax) and the VAT it has paid on its purchases (input tax).
In the UK, it is a legal obligation to pay the correct VAT and failure to do so may result in significant financial penalties and even legal action by HMRC. These VAT penalties can be severe, potentially impacting your business’s financial health.
Though failure to pay the correct VAT can have significant consequences, businesses continue to make VAT errors when it comes to paying VAT.
At Tax Driven Accountants, we have helped a range of businesses remain tax compliant and pay the money they are required to pay, and in this guide, we will outline some of the common VAT mistakes that could cost your business.
Misunderstanding VAT Registration Thresholds
Timing is everything when it comes to registering your business for VAT. There is a set taxable turnover threshold that currently stands at £85,000 in the UK. Once your turnover exceeds the threshold, you are required to register your business for VAT and obtain a VAT number.
A huge mistake that businesses make is assuming this only applies to the financial year, when it in fact applies to a rolling 12-month period, so no matter the month your business hits the threshold, you must register your business for VAT within 30 days.
Failure to register may lead to backdated bills, interest charges and even VAT penalties, so it is recommended that you work with an accountant to ensure you are paying the correct VAT at the correct time.
Incorrectly Claiming VAT on Expenses
Another common problem faced by businesses is incorrectly claiming VAT on expenses. It can be confusing to understand which expenses you can claim VAT on, but the law states that you can only reclaim VAT on goods and services used exclusively for your business. This process is known as input tax recovery.
Examples of services and goods that you can claim VAT on include:
- Office equipment
- Travel and subsistence
- Vehicles and fuel
- Professional services
- Utilities and rent
- Payroll
Some examples of costs that can not have VAT reclaimed on them include:
- Anything for personal use
- Business entertainment
- VAT-exempt goods and services
- Travel
- Goods your business no longer has
There is often a lot of confusion when it comes to what can and can’t be claimed on, with many people believing that anything vaguely related to work can be reclaimed, which once again only further emphasises the significance of working with an accountant who can help you accurately understand your VAT obligations.
Failing to Charge VAT Correctly
If you have a lack of understanding of VAT rules, have made an error in your accounting or have missed any transactions, it can be easy to charge VAT incorrectly. This can lead to issues with output tax calculations. If you do not correct any incorrect VAT claims that you make promptly, you may receive VAT penalties and even interest charges.
If you are found to have overclaimed VAT, you are expected to repay the incorrectly claimed VAT. You may also be required to pay further interest from the original due date of the VAT until the outstanding amount is paid in full.
Missing VAT Return Deadlines
UK businesses are required to submit their VAT Return to HMRC and ensure that any VAT owed is paid within a specific timeframe. This deadline is set at one month and seven days after the end of their accounting period. Meeting this deadline is crucial to ensure VAT compliance with tax regulations and avoid potential penalties or interest charges for late submission or payment.
When it comes to late repayment charges, the HMRC runs on a points-based system, where each late return submission receives one penalty point. Once you have reached the threshold, you are charged a £200 VAT penalty, with further £200 penalties charged for each subsequent late payment.
Once a mistake is made, it can quickly spiral, leaving your business in a challenging financial position. Therefore, it is important to seek the support you need for your business as soon as an error occurs.
Inaccurate Record Keeping
One of the biggest reasons that VAT errors occur when it comes to paying VAT is inaccurate record-keeping. We get it, having a business can be overwhelming, and when you’re busy, it can be easy to let some earnings or outgoings for your business slip your mind.
By keeping inaccurate records, you’re ultimately setting yourself up for failure, which could result in both legal and financial consequences for your business. From the second you start spending and making money in your business, you should keep accurate VAT receipts and maintain proper VAT invoices to ensure that you’re equipped when tax season rolls around.
A lot of businesses depend on a professional bookkeeper to ensure that they keep an accurate account of their finances.
Bookkeeping can be a tedious process, so we always suggest leaving it to the professionals to take care of it for you. They will not only make sure that all business transactions are accurately recorded, but they’ll also advise you throughout the bookkeeping process.
Ignoring Changes in VAT Legislation
There have been several instances where VAT legislation has changed, with Brexit being a perfect example of this. With legislative changes come new rules and expectations for businesses, and it’s essential to stay up to date with these changes to ensure compliance.
Regularly consulting a VAT expert will not only ensure that you know when VAT legislation changes happen, but it will also make sure that you are properly prepared and can respond as needed. This includes understanding various VAT schemes such as the flat rate scheme, cash accounting, and partial exemption methods.
VAT experts can help with your business accounts and taxation, so you don’t get surprised with charges or interest. They can also assist with VAT inspections and represent you in case of a VAT tribunal.
Not Seeking Professional Advice
When starting your own business, it might be tempting to handle every task yourself, but this can often cause burnout and mistakes. Getting professional advice for your accounts is crucial as it ensures accuracy, regulatory compliance, and improved financial management. Experts can spot VAT errors, provide strategic guidance on VAT treatment of various transactions, and help plan for long-term financial security.
Avoid Mistakes With Tax Driven Accountant
In this guide, we hope to have clarified the most common VAT mistakes that businesses tend to make, while also emphasising the importance of working with an accountant to ensure you remain compliant with VAT legislation.
At Tax Driven Accountants, we have helped countless businesses remain compliant with VAT regulations, and we’re ready to support your business while you focus on the tasks that really matter. We can assist with various aspects of VAT compliance, including handling standard rate, reduced rate, and zero-rated supplies, as well as managing VAT-exempt transactions.
Contact us to learn how we can assist you with your VAT needs, including VAT recovery, bad debt relief, and navigating complex areas like partial exemption.