Seven common VAT mistakes to avoid

A woman struggles to indentify the mistake in her VAT return

There are 5.5m private businesses in the UK and about 2.5m of them are VAT-registered (source: HMRC). More than a million have an annual VAT-able turnover below the £85k VAT threshold, but they're registered nonetheless – and there can be many good reasons for doing so.

Not every business gets it right when it comes to managing VAT and errors can be big and small. So, which common VAT mistakes should your start-up or small business avoid making?

1 Entering the wrong figures…

Whether in your VAT accounting software or in your VAT returns, which later creates issues for you when your VAT figures simply don't add up. It can happen innocently enough, through simple lack of knowledge or lack of diligence when entering figures into your VAT accounting software or VAT returns. It's best to correct such mistakes as soon as they come to light is advised, especially now that VAT registered businesses must comply with Making Tax Digital requirements.

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2 Trying to reclaim input VAT without having a valid VAT invoice…

Buyers cannot reclaim input VAT if they don't have a valid VAT invoice from a supplier. If you pay a supplier in advance, you can't reclaim the VAT part of the payment if you don't have a valid VAT invoice. If you reclaim input VAT on a supplier's invoice, but fail to pay them within six months, normally you must repay the VAT to HMRC.

3 Leaving out essential VAT invoice details…

For most transactions, you will need to send a full VAT invoice to your customers. It must include:

  • a unique VAT invoice number that follows on from the previous VAT invoice
  • your business name and address
  • your VAT number (it begins with the letters GB and is followed by nine numbers
  • invoice date
  • tax point or “time of supply” if this is different to the invoice date
  • customer's name/trading name and address
  • description of the goods or services supplied
  • total amount excluding VAT
  • total amount of VAT
  • price per item excluding VAT (if applicable)
  • quantity of each type of item (if applicable)
  • discount rate per item (if applicable)
  • VAT rate charged per item (if something is exempt or zero-rated you should make it clear that no VAT has been charged on these items).

A modified invoice can be issued for retail supplies costing more than £250. It must contain all of the above, as well as the VAT inclusive price of products/services and the total amount including VAT.

A simplified VAT invoice, which can be issued for retail supplies below £250, need only include:

  • a unique VAT invoice number that follows on from your previous VAT invoice
  • your business name and address
  • your VAT number
  • tax point or “time of supply” if this is different to the invoice date
  • description of the goods or services supplied
  • VAT rate charged per item (if something is exempt or zero-rated you should make it clear that no VAT has been charged)
  • Total amount including VAT (if items are charged at different VAT rates, this should be detailed for each).

4 Failing to submit VAT returns and pay any VAT due on time…

Failing to submit a VAT return or pay your VAT bill on time carries a fixed surcharge of up to 15% depending on how many times you “default” in a 12-month period. Additional penalties can be up to 100% of the VAT due, depending on whether you were careless or made a deliberate error – and tried to conceal it.

If you discover you have made a mistake, you must correct it. Errors of up to £10,000 or 1% of turnover (whichever is higher) up to £50,000 maximum can be adjusted on your current VAT return. Government website GOV.uk explains how to correct errors on your VAT returns.

5 Not issuing VAT invoices on time…

VAT invoices must usually be issued within 30 days of the date of supply or date of payment (if you're paid in advance). For goods, the date of supply is the date they're sent, collected or made available. For services, the date of supply is the day the service was supplied or completed if it was supplied over a number of days.

6 Trying to reclaim the VAT after paying a third-party invoice…

Only the recipient of the supply can reclaim the input VAT. As an alternative, you could settle just the net value and get the third party to pay the VAT portion of the invoice and then reclaim the VAT themselves.

7 Issuing a VAT invoice when it's not necessary…

You do not have to issue a VAT invoice if, for example:

  • your VAT invoice is only for exempt or zero-rated sales within the UK
  • you're gifting goods
  • you sell goods under a VAT second-hand margin scheme or
  • your customer operates a self-billing arrangement.

If in any doubt about your obligations as a VAT-registered business, seek tailored professional advice.