The world of VAT is complicated and to many business owners, it can feel like a complete minefield. We regularly see a widespread lack of understanding among businesses relating to VAT, and this can lead to a number of issues.
So here's our guide to the most common mistakes that people make with VAT and how to avoid them:
1. You have failed to register for VAT at the correct time
If you have not already registered for VAT, it is important to check whether the turnover from sales of VATable goods and services has surpassed the VAT registration threshold (currently £85,000) on a rolling 12 months basis.
When sales have reached the VAT registration threshold and the business has registered for VAT, most businesses will submit VAT returns to HMRC every three months. Small business owners may benefit by electing to use the VAT flat rate scheme, which allows the business to account for VAT by paying a set percentage rate based on their gross turnover and the type of business they run.
2. You keep putting things off
Many businesses fall short because they are always leaving their VAT return to the last minute. This can cause all sorts of problems, not least potential fines for late filing - the penalties increase with each late VAT return to a maximum of 15% of the VAT due.
What's more, if the return is completed in a rush it's more likely that VAT accounting errors could be made or transactions might be missed off – and this could also leave you liable for penalties if the VAT due to HMRC is understated.
Issues such as these can be successfully avoided by ensuring VAT remains a constant priority all year round. It is essential that files can be located and issued with ease and deadlines throughout the year are met without rushing. Set reminders on your company calendar to ensure these dates are not overlooked.
3. You fail to clarify responsibility for VAT
We often find that business owners have a strong understanding of VAT but it is not actually them that handles day-to-day VAT processes. It's vital to identify an individual who will be responsible for VAT and ensure that they have everything they need in order to remain compliant with VAT regulations.
Some businesses give this responsibility to administrative employees who process orders and sales; others ask the financial director to take charge of VAT compliance. Problems arise when different individuals across the same firm have a different approach or level of understanding relating to VAT.
4. You don't think like an inspector
Business owners or those directly responsible for VAT would be well advised to think like a VAT inspector before conducting an audit of the organisation's financial processes. Performing a makeshift VAT audit to identify VAT that has been under or over declared will highlight gaps in knowledge among personnel, as well as any ongoing mistakes that are being made.
Paying additional attention to VAT can uncover some potentially serious errors; and it is very often simple mistakes or misunderstandings that can cause the biggest headaches further down the line. By carrying out these checks regularly, penalties can be avoided and disclosures can be made to HMRC to correct the VAT position, reducing your chances of being fined.
Sponsored post. Copyright © 2017 Tamara Habberley is senior VAT consultant at The VAT People.