As business accountants we review and submit many VAT returns for clients who do their own book-keeping.
Book-keeping tends to be a misunderstood task that actually involves a lot of skill to get right! As a result, when we do VAT returns for clients, we often spot and correct errors before the return is submitted.
VAT mistakes we see all the time
Here are the top 5 VAT return mistakes we come across. Now you know about them, you can avoid these common – and costly – errors!
Mistake #1: Claiming VAT on insurance
Without doubt this is THE most common mistake we see in VAT returns. Almost every day, we spot that a business owner has claimed VAT on an insurance payment.
You don’t need to.
Insurance is VAT exempt, and therefore should not have VAT claimed on it. Business insurance (??) does have a form of tax added to the cost, but sadly it’s not VAT and therefore not reclaimable on your VAT return.
So if you have put a ‘20%’ vat code next to your insurance transaction from your bank account, take it off right now!
Mistake #2: VAT on wages or payments to HMRC
We must admit, sometimes accounting software can help you make a mistake with VAT. It’s so easy inside accounting software to allow the program to add VAT codes where it shouldn’t. As a result, we see often payments made to the owner, or to team members, with VAT codes in them.
If you do this, your application will claim a proportion of that payment against your VAT. This will incorrectly reduce your VAT bill and you’ll end up having to pay the correct amount later, potentially with penalties if HM Revenue & Customs spot it.
We’ve even seen this error with payments of tax, where an owner has mistakenly used the ‘20%’ vat code, claiming VAT on a Corporation Tax payment! For clarity, there certainly is no VAT on corporation tax payments! (If only…)
Mistake #3: Reclaiming VAT without proof
This one is a biggie. During any HM Revenue & Customs inspection, they will ask to see your VAT receipts for VAT claimed.
The VAT rules specifically require receipts to include certain things in order to claim VAT, and HMRC are very strict in its application of this. We’ve seen VAT reclaims denied because the name on the receipt isn’t quite right, for example.
For items under £250, you may not receive a ‘full’ VAT invoice. However, you will still need to retain whatever receipt you get. Check out the HMRC guidance on VAT receipts.
You need to keep VAT receipts for around 6 years. These can be held electronically.
Mistake#4: Using the VAT flat rate scheme incorrectly
The VAT Flat Rate scheme used to be awesome. Sadly, like many things that are too good to be true, HMRC came and ‘fixed’ it a few years ago.
Businesses in certain situations can opt to make their record-keeping simpler and apply to join the Flat Rate Scheme. On this scheme, you simply:
- Add up the money you’ve had in (subject to certain criteria)
- Apply a % HMRC give you, based on your type of trade
- Hand over that amount of VAT
Nice and simple!
These rates are generally worked out so that they have an inbuilt amount of VAT HMRC would expect a business like yours to reclaim. This saves you recording and adding up every transaction when you have spent money.
For example, you might hand over (say):
- 12% of all money you had in
- charge 20% VAT and hand that over, less any VAT you’ve incurred.
For some businesses this works out well.
Where owners get caught out is that HMRC added a rule called ‘limited cost business’. This means you must apply a 16.5% rate of VAT unless you buy goods that are less than either:
- 2% of your turnover
- £1,000 a year (if your costs are more than 2%)
We see this point being missed all the time, which means the business is paying over far less VAT than it should.
We will leave the number comparisons for another blog, but let’s just say when you do the numbers, being on the flat rate scheme in this instance is nearly always worse! See the HMRC guidance on the limited cost business.
Mistake #5: The wrong VAT code used
In the above examples, the wrong VAT codes have been used which impact on the tax being reclaimed (or not!). However, it’s possible to technically use the wrong codes and not impact your tax bill.
This can still cause your VAT return to be wrong in other areas however, such as box 6 or 7 that show certain sales or purchases figures.
One example of this is where the code ‘NO VAT’ has been used, where actually it was a ‘zero rated’ purchase, such as some food.
Again, in HMRC inspections, these issues will be picked up.
Vexed by your VAT returns?
If you don’t have an accountant, or feel you aren’t making the most of VAT codes with your current accountant, we’d love a chat about how we can help.