Most VAT errors are simple and easy to avoid once you know them. Here are the ones that catch businesses out most often, and how to stay clear of each.
Charging the wrong VAT rate
It is easy to put the standard rate on something that is reduced rated, zero rated or exempt. Food, children’s items and building work all have edge cases. Charging the wrong rate can mean you owe HMRC, or that you overcharge customers. When in doubt, check GOV.UK or ask an accountant.
Reclaiming VAT without a valid invoice
To reclaim VAT you need a valid VAT invoice, with the supplier’s VAT number and the required details. A card receipt, a statement or a proforma invoice is not enough above £250. Keep the proper paperwork for every claim.
Subtracting 20% to remove VAT
Taking 20% off a gross price gives the wrong net figure. £120 minus 20% is £96, not £100. To remove VAT you divide by 1.2, because VAT is worked out on the net price. Use the reverse VAT calculator to be sure.
Mixing business and personal costs
When a cost is part business and part personal, such as a phone bill, you can only reclaim the business share. Reclaiming the whole amount is a common error that HMRC checks for.
Missing the registration deadline
You must register within 30 days of going over £90,000 in a rolling 12 month period. Miss it and you owe backdated VAT that you cannot recharge to customers. Check your rolling total every month.
Forgetting the 30 day future test
Registration is not only about the past. If you expect to go over £90,000 in the next 30 days alone, you must register straight away. A single large order can trigger this.
Getting the tax point wrong
The tax point, or time of supply, decides which return a sale belongs to. Getting it wrong can shift VAT into the wrong period and lead to penalties. For most sales the tax point is the invoice date or the payment date, whichever comes first.
Not keeping records long enough
You must keep VAT records for six years. Losing them, often when you switch software or accountant, can cause problems in a check. Back up your records and keep copies.
Reclaiming VAT on client entertainment
You can reclaim VAT on staff entertainment, but not on entertaining clients. If clients are present, it counts as client entertainment, and the VAT is not reclaimable.
Filing late because you cannot pay
Some businesses miss a return because they cannot pay the bill. That brings a penalty point and charges on top of the unpaid VAT. Always file on time and contact HMRC about paying in instalments.
Frequently asked questions
What is the most common VAT mistake? Charging the wrong VAT rate is one of the most common, along with reclaiming VAT without a valid invoice.
Why is subtracting 20% to remove VAT wrong? Because VAT is worked out on the net price, not the gross price. You divide the gross by 1.2 instead.
Can I reclaim VAT on client entertainment? No. VAT on client entertainment is not reclaimable. Staff entertainment is different.
How long must I keep VAT records? Six years. Keep backups, especially when you change software or accountant.
What happens if I register for VAT late? You owe backdated VAT from the date you should have registered, and you cannot recharge it to customers.