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VAT mistakes that could land your business in trouble

Making a VAT-related mistake can be costly – HMRC will expect outstanding VAT to be paid and may also levy penalties and interest. Below Emma Rawson lists common VAT mistakes that could easily get businesses into hot water.

NOT registering: a fundamental, but common, error isn’t registering for VAT when required to.

Very broadly, a UK-based business is required to register for VAT if the total VAT taxable turnover in the past 12 months was over the VAT registration threshold (currently £85,000); or is expected to go over the threshold in the next 30 days.

The first ‘backwards looking’ test has to be considered at the end of every month – something which can be easily missed if a business isn’t up-to-date with its records, or only speaks to its accountant once a year.

The second ‘forward-looking’ test has to be considered every day and is worth keeping in mind if, for example, the business receives a particularly large order or contract.

Once either of the tests is met, the business needs to register for VAT with HMRC within 30 days. If it’s late, HMRC will not only ask it to pay VAT on any sales made since the date it was supposed to be registered, but can also charge a penalty of up to 100% of the unpaid VAT.

Not deregistering
At the other end of the spectrum, businesses may not spot when they can, or indeed have to, deregister from VAT.

Once registered for VAT, if it ceases to trade or make VAT taxable supplies it has to tell HMRC to cancel its registration within 30 days. As with failure to register on time, failure to deregister can result in a penalty of up to 100% of any lost VAT revenue.

If the business continues but shrinks so that it falls back below the VAT registration threshold, it can also choose to voluntarily deregister from VAT. Whilst deregistering may bring advantages in terms of not having to charge VAT and file VAT returns, there are downsides as well. For example, it may need to account for any VAT on stock or assets in hand at the date of deregistration and will lose the ability to reclaim any VAT it incurs on purchases.

The pros and cons should be carefully considered before deciding on whether to stay VAT registered, as getting it wrong could be a costly mistake.

Claiming without a valid invoice
Generally, a business can’t reclaim any VAT it has paid unless it has a valid VAT invoice. This needs to contain specific information, including the amount and rate of VAT charged and the VAT registration number of the supplier. Importantly, it can’t claim VAT back using an invalid invoice, a pro-forma or a delivery note.

It’s therefore important to check that it’s receiving the right kinds of invoices from its suppliers. Otherwise, HMRC could ask the business to pay them back any VAT it has reclaimed, along with interest and penalties.

VAT registered businesses also have a legal requirement to provide a valid VAT invoice to their VAT registered customers. As an aside, general retailers like shops don’t have to issue a VAT invoice, unless specially requested.

Reclaiming more than the business is entitled to
A common error made by VAT registered businesses is to assume that they can reclaim VAT on all of their expenses. However, some expenses won’t have VAT charged in the first place because they are zero rated or exempt.

Common examples include insurance, and bus and train travel. There are also special rules which block the business claiming VAT back on certain expenses – for example it can’t claim VAT incurred on entertaining clients.

One area where there are lots of special rules is motoring expenses. As a general rule, a business can’t claim VAT back when it buys a car (unless it bought the car to sell on or hire out as part of the business, are a taxi driver or driving instructor, or can prove that the car is never available to employees or anyone else for private use). If instead of buying a car it’s leased, then generally only 50% of the VAT charged on the lease payments can be recovered.

Recovering VAT on petrol or diesel is also tricky – broadly the business can either choose to only claim the VAT back on fuel used for business miles, or it can claim all the VAT back and pay a fuel scale charge to account for private use. Whichever option is chosen, it must be applied across the whole business fleet.

And where the business is a sole trader or partnership, it also needs to watch out for the rules on personal use. If an expense has both business and personal use, it can only claim the VAT on the business element. For example, if there is a mobile phone where a quarter of the calls are personal, it can only reclaim the VAT on 75% of the costs associated with that phone.

Missing bad debt claims
In a time when businesses across the UK are feeling the squeeze, it’s important they don’t miss out on the chance to claim VAT bad debt relief.

If a business has supplied a customer with goods or services and they haven’t paid, the business may be able to claim the VAT back from HMRC. It must have already paid the VAT over to HMRC and written the debt off in its books – if there’s a good chance that the business might still be paid, it’s unlikely to be able to get relief. The debt also has to have been unpaid for at least six months.

One thing that’s easily missed is that these rules cut both ways – if the business has purchased goods or services and not paid the supplier six months after the due date, HMRC will expect the repayment of any VAT recovered on that purchase. Failure to do so could result in interest and penalties.

Keep track of points and payments
In January 2023, the previous ‘default surcharge’ regime which applied to late VAT return filing and late payment of VAT was replaced by a new penalty system.

Broadly, under the new late filing penalty regime, a business will get a penalty point each time it files a VAT return late. Once the points reach a certain threshold (four points for quarterly returns) a £200 penalty will be charged. Each subsequent late submission will also incur a further penalty, until the points expire following a period of good behaviour.

Unlike under default surcharge, a business can now receive a late filing penalty even if it usually files nil returns, or claims a repayment of VAT.

It’s therefore important to keep track of any penalty points to make sure the practice doesn’t end up with a penalty. This can be done by logging into the business’ online HMRC Business Tax Account.

Getting groups wrong
Lastly, forming a VAT group can have distinct advantages. For example, a VAT group only submits a single VAT return covering all members, and supplies between VAT group members can generally be disregarded for VAT purposes.

However, there are a number of complications VAT group members need to be aware of.
One thing to watch for once the group is in place is that the various thresholds and limits for VAT will apply to the group as a whole, and not the individual members. For example, the £10,000 limit for correcting an error on the next return and the payments on account threshold of £2.3m. This could see these rules taking effect earlier than expected.

VAT is a quagmire ready to swallow up all who come across it. With so many quirks, foibles and traps set up it’s important to take good advice; even those who consider themselves au fait with VAT can make mistakes which are expensive to resolve.

Emma Rawson is technical officer for the Association of Taxation Technicians (ATT)

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