VAT mistakes that cost thousands – and how to avoid them

Value Added Tax is one of those levies that looks simple on the surface, but VAT mistakes can easily trip up even experienced business owners.

For many firms, it’s not a lack of effort that causes VAT errors. Rather, it’s the complexity of ever-changing rules and the simple fact that day-to-day business pressures usually take priority.

Unfortunately, VAT mistakes can be expensive. They can lead to penalties, lost opportunities to reclaim overpaid tax, or cashflow headaches that can take months to fix.

With this in mind, we round up some of the most common VAT pitfalls and help you to avoid them.

1. Registering or deregistering at the wrong time

You must register for VAT when your taxable turnover exceeds £90,000 over a rolling 12-month period (or if you expect it to do so in the next 30 days).

Unfortunately, many smaller firms fail to do this because their bookkeeping isn’t up to date, or they assume the registration threshold applies to profit rather than sales.

It’s important to get registration right. Late registration means backdated VAT bills, interest and penalties.

On the flip side, staying registered after your turnover has fallen below the deregistration threshold (£88,000) means you could be paying unnecessary admin costs, or charging VAT that you don’t want (or need) to.

Tip: to avoid these VAT mistakes, review your rolling 12-month turnover regularly, especially if you are close to the registration / deregistration limits. Your THP accountant can set up alerts in your cloud accounting software to warn you when you are getting close.

2. Using the wrong VAT scheme

There are various different VAT schemes and choosing the right one can save you time, money or both. These schemes include:

• Flat rate scheme. This simplifies VAT reporting, but it’s not always as cost efficient as it once was. This is especially so if you are a ‘limited cost business’ with a low VAT expenditure. This pushes your flat rate up to 16.5%.
• Cash accounting scheme. This lets you pay VAT when your customers pay you rather than when you invoice them, potentially improving cashflow.
• Annual accounting scheme. This reduces admin because you do a single annual return instead of four quarterly ones. However, if you reclaim VAT regularly you have to wait longer to be paid back.

Tip: don’t assume the scheme you started with years ago is still the best one. To avoid VAT mistakes by using the wrong scheme, review your VAT position regularly with your THP accountant.

3. Getting the VAT rate wrong

Potentially, one of the most expensive VAT mistakes you can make is charging the wrong rate. Not all sales are standard rated for VAT. Depending on what you sell, your supplies could be:

• Standard-rated (20%)
• Reduced-rated (5%)
• Zero-rated (0%)
• Exempt

This can cause confusion and errors, especially for businesses dealing in industries which regularly have to charge different rates for different products and services. Charging the wrong rate can also land you before a tribunal, as one company after another has found.

Tip: to avoid VAT mistakes, double-check the VAT liability of your products or services whenever you launch something new. If in doubt, ask your accountant for advice.

4. Reclaiming VAT wrongly on expenses

In our experience, this is one of the most common VAT mistakes. It’s important to realise that not every business expense qualifies for VAT recovery. Common problem areas include:

• Client entertainment (almost never reclaimable)
• Personal use of vehicles (you can’t claim personal mileage)
• Mixed-use costs such as mobile phones or home office expenses (it’s vital to claim only the correct proportions – and this isn’t always easy!)

HMRC expects clear, consistent records showing which portion of each cost relates to business use. Without them, you risk disallowed claims or even penalties for careless reporting.

Tip: keep digital copies of receipts and annotate them with purpose or usage split. Cloud accounting apps make this easy.

5. Not reconciling VAT returns properly

Submitting your VAT return is only half the job. Many smaller businesses in particular skip the final reconciliation step. This is when you match the figures in your accounting software to your actual bank payments, sales and purchases. Without this, VAT mistakes can compound quarter after quarter.

Tip: always perform a full VAT reconciliation before filing. Your THP accountant can help set up automated checks in Xero, FreeAgent or your preferred accounting software.

Other VAT mistakes

There are other VAT mistakes that it’s worth looking out for. These include incorrectly applying or accounting for the domestic reverse charge for building and construction services or the VAT reverse charge on services from abroad. It also goes without saying that you shouldn’t miss any Making Tax Digital for VAT deadlines.

To summarise, VAT doesn’t have to be a minefield,  but it does require attention to detail. For most owner-managed businesses, the key is maintaining accurate digital records, reviewing VAT schemes periodically and getting professional guidance before making changes.

At THP, we help business owners stay compliant, avoid costly mistakes, and use VAT planning to improve cashflow rather than hinder it. If you think it’s time for a VAT check-up, get in touch with one of our friendly team members today.