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Five VAT mistakes to avoid


By Tamara Habberley, senior VAT consultant, The VAT People

The concept of VAT is incredibly complicated, and is often difficult for businesses across a variety of sectors to grasp. Unfortunately, VAT regulations are filled with several mind-boggling rules that must be followed in order to be compliant, which means businesses across all sectors very often sweep VAT under the carpet. 

Here, we will examine VAT more closely and hone in on the five most common mistakes businesses make when it comes to VAT.

Failing to register

Even the seemingly simple task of registering your business for VAT can be complicated and stress-inducing. Many firms do not realise they are only required to register for VAT once their turnover exceeds £85,000 on a 12-month basis, or if they generate a VAT-able income of £85,000 in a single month.

This lack of understanding can leave firms vulnerable to fines, so it is important to check whether sales have reached the HMRC limit of £85,000 in the past 12 months of operations, or whether you expect to generate VAT-able supplies in excess of this limit in a 30-day period. 

Using incorrect rates

Businesses where sales have reached the aforementioned limit are required to submit VAT returns to HMRC. This can either be carried out on a monthly or annual basis. 

Smaller firms are usually advised to select the flat rate scheme, which offers an alternative method for companies to work out how much VAT they need to pay every quarter. Designed to take some of the difficulty away from VAT payments, this method is usually far less than the usual 20 per cent payment. 

Reclaiming VAT on entertainment

According to HMRC regulations, businesses are not permitted to recover VAT on entertaining anyone other than current employees of the business. This means claiming VAT on other entertainment costs for clients is forbidden. 

Many small businesses spend a great deal on entertaining, but it is vital that they are aware of the strict rules outlined in this area. You must not reclaim money that is spent on entertainment, or you could face a loss of VAT, plus penalties and interest charges. 

Failing to educate staff 

While business owners usually have a reasonable level of knowledge regarding VAT, it is very rarely this individual who handles this side of the business. A lack of knowhow can put companies at risk of incurring penalties. 

Businesses should identify exactly who will be the person dealing with VAT from day to day, ensuring they have the expertise required to make sure the organisation complies with regulations. 

It is recommended for firms to roll out a standard approach to VAT across the business, and owners should regularly check what happens in practice to promote consistency. 

Leaving things until the last minute

The end of the financial year can be an incredibly stressful time for businesses across a variety of sectors and, very often, companies feel rushed to complete the necessary procedures. It goes without saying that leaving things until the last minute can cause a number of issues for businesses, so it is essential that plans are made to prevent this. 

We regularly see companies discover the VAT threshold of £85,000 was exceeded far earlier than they originally thought, or a VAT return may be omitted, leaving the business vulnerable to penalties.

VAT should be kept in mind throughout the year, and any deadlines that arise should be followed to avoid the risk of incurring unnecessary penalties from HMRC.