VAT is difficult. There are lots of little complexities and quirks that catch business owners out. And it can be costly – if HMRC find errors in your returns, they can fine you.
We check VAT returns on a daily basis. So, what are the 10 top mistakes to avoid on your VAT returns? Here’s our list.
1 – Poor record keeping
At its simplest, you can’t prepare a VAT return without the proper records. You need your own sales invoices plus all of your purchase invoices.
Strictly speaking, you can’t reclaim VAT without a valid purchase invoice. Therefore, keep them! This is where apps such as Receipt Bank can be really handy – you can take a photo as soon as you’re given the invoice and, hey presto, it’s uploaded and logged in your accounting software.
We also see lots of examples of businesses entering the wrong figures – net figures as gross, and vice versa. Take care when entering them.
2 – Deposits or Payments on Account
Basically, HMRC want the VAT as soon as possible. Therefore, any deposit or payment on account triggers a “tax point”. The tax point is the date that you must account for VAT and include it in your return.
A deposit triggers the tax point even if you haven’t raised an invoice yet. If you’ve had the cash, you need to declare the VAT.
The only exception is on a returnable deposit if you hire out goods as part of your business.
3 – VAT on Entertainment
It’s a simple rule, but one that is often ignored or not known. You cannot claim the VAT back on business entertainment, ie taking out clients or business contacts to restaurants, concerts, theatre, sporting events, etc.
It’s actually one of our pet hates seeing corporate hospitality advertised as costing “£x plus VAT” as it can’t be reclaimed!
The exception is if you’re taking out your own staff – you can reclaim VAT on these expenses.
4 – Claiming back VAT twice
This might sound obvious, but it’s amazing how often we see the tax reclaimed twice on the same expense. It’s usually because the business has included the invoice
5 – Land and property
Think the above are complex? Have a look at land and property! There are so many complexities to VAT on property transactions, it really is hard to keep up. Instead of writing a 1,000 page manual here, we’ll keep it short – ask an expert!!
6 – Charging the wrong rate, or not at all
The standard rate of VAT is 20% on your sales. However, some goods are zero-rated, eg newspapers or children’s clothes. And some goods are exempt, eg insurance.
There may also be no VAT if you’re selling to a customer abroad and certain conditions are met. Or if you’re selling to a charity.
The flip side is that we see some businesses not include VAT when they should, for example on recharging expenses. Or selling an asset of the business, eg computers or furniture.
7 – Not repaying VAT on unpaid invoices
Generally, the tax point is the date of the invoice. Therefore, you can reclaim the tax when you receive a purchase invoice, even if you haven’t paid it yet.
However, if the invoice is still unpaid after 6 months, you’re required to repay the VAT to HMRC!
8 – VAT on Travel
We could probably manage a separate blog with 10 mistakes just relating to travel! Common errors include:
- Claiming back on train tickets, air fares, bus or taxi – there’s no VAT on these
- Claiming on petrol without applying the Fuel Scale Charge
- Not claiming on business mileage claims
- Claiming back on car leases – you can only claim 50%
- Claiming back on the purchase of a vehicle – only allowable if there’s no private use
- Not keeping petrol receipts when claiming on business mileage – even though you’re not claiming the VAT on the petrol directly, you still need to keep receipts
9 – Forgetting to submit an EC Sales List
If you make sales to VAT registered businesses in the EC, you need to prepare and submit an EC Sales List.
To add to the fun, these don’t necessarily tie in to the dates of your VAT returns. They’re on a quarterly basis but are fixed as March, June, September and December quarters.
10 – Using the wrong VAT scheme
There are a few different schemes out there – Standard, Flat-Rate, Cash, Margin schemes, etc. Do you know which is best for you? And when did you last assess it? Rules change, and your business changes, so it’s worth checking every year.
All in all, it’s a complex tax. If you’re not sure, the best bet is to ask your accountant.
It’s also worth viewing your quarterly return as a chance to assess your business, not just a necessary evil for HMRC’s benefit.
A quarterly review can really help you see how the financial side of your business is stacking up. For example, struggling to pay your VAT bill is an indication that something’s wrong with your business model. Are you profitable enough, or is cashflow the problem?
By combining your VAT return with a management report from your accountant, you can turn the process into something really helpful to make your business better.
Thanks to MJF Accountancy Ltd for this article.
For more advice and assistance CLICK HERE: MJF