Value Added Tax (VAT) can be a complex area for businesses, and many make costly errors when managing their VAT obligations. Understanding these common VAT mistakes and knowing how to avoid them can save time and money and reduce the risk of penalties from HMRC.
JRMA handles the VAT affairs of many businesses throughout Bromsgrove and the surrounding area. This blog explores some of the most frequent VAT errors businesses have made and provides practical solutions to help them stay compliant.
Not knowing the criteria for breaching the VAT threshold is a very common VAT mistake. Many business owners assume that as long as they keep their turnover below the VAT threshold (currently £90,000) during their financial year, they will not have to register for VAT.
Unfortunately, this is incorrect. You must register for VAT if either:
How to avoid it: Make sure you keep accurate and up to date records of your turnover. This can be done using an accounting package such as Xero or Quickbooks or by using an Excel spreadsheet. As well as logging all of your sales/turnover, you should regularly monitor your total turnover to see if you are about to exceed the threshold.
One of the most common VAT mistakes is not registering for VAT when required. If your business’s VAT-taxable turnover exceeds the VAT threshold, you must register within 30 days. Failure to do so can lead to penalties and backdated VAT charges.
How to avoid it: Keep track of your turnover regularly and apply for VAT registration as soon as you approach the threshold. If your turnover fluctuates, set up alerts to monitor when you might need to register.
Many businesses either charge VAT incorrectly on sales or don't reclaim VAT on eligible purchases, leading to financial losses.
How to avoid it: Ensure you apply the correct VAT rates (standard 20%, reduced 5%, or zero 0%) on sales invoices. Additionally, check all business expenses to see if VAT can be reclaimed. Keep VAT receipts and use an accounting system that accurately tracks VAT inputs and outputs.
Missing VAT return deadlines can result in fines and penalties. HMRC expects VAT returns to be submitted and payments made on time.
How to avoid It: Set reminders for VAT return deadlines and consider using accounting software with automated alerts. If using an accountant, such as JRMA, ensure they have all required records well in advance of the VAT submission deadlines.
Businesses often make common VAT mistakes when dealing with VAT on goods and services bought from or sold to other countries. Post-Brexit VAT rules add another layer of complexity.
How to avoid it: If importing goods or services, check whether you need to account for VAT under postponed VAT accounting. For exports, ensure you apply the correct VAT rate and maintain proper documentation to support zero-rating claims.
Since 2022, all VAT registered businesses must comply with HMRC’s Making Tax Digital (MTD) for VAT scheme. This means using MTD compatible software, which will digitally link your income and expenditure to HMRC’s MTD for VAT portal, allowing you to submit your VAT return online without rekeying the information. HMRC will automatically sign up your business for MTD once you become VAT registered.
How to avoid it: Familiarise yourself with HMRC’s MTD for VAT scheme and what actions you must take to comply, including which software to use.
Good record-keeping is essential for VAT compliance. Businesses that fail to maintain accurate records risk errors in VAT returns and potential penalties from HMRC.
How to avoid it: Use digital accounting software to maintain accurate records and securely store invoices, receipts, and VAT calculations. This will help with Making Tax Digital (MTD) compliance and future audits.
Failing to specify VAT in contracts and quotes can lead to pricing disputes and unexpected liabilities.
How to avoid it: Always clarify whether quoted prices are inclusive or exclusive of VAT. This avoids confusion and ensures correct invoicing.
The VAT domestic reverse charge was introduced in 2021 and applies to businesses in the construction sector. Instead of the supplier charging VAT on their invoice, the customer must account for VAT on their VAT return.
How to avoid it: Check if the reverse charge applies to your business, i.e. are you a VAT registered business providing construction services under the Construction Industry Scheme (CIS)? If so, you must clearly state when the reverse charge applies and do not charge VAT on invoices. You should also confirm that your accounting system can handle reverse charge VAT correctly.
Avoiding these common VAT mistakes is essential for smooth business operations and compliance with HMRC regulations. Businesses can prevent costly errors by keeping accurate records, meeting deadlines, understanding the current VAT rules, and using reliable accounting software which complies with MTD for VAT.
If in doubt, please get in touch with JRMA. We will be happy to discuss how the VAT system works and what you need to do for your business.
