13 common small business VAT mistakes - And how to avoid them

Did you know that HMRC is cracking down on businesses underpaying their VAT? Apparently HMRC collected a whopping £3.4bn extra in VAT under-payments from small and medium-sized businesses during the 2016-2017 tax year, part of a big crackdown on tax evasion. And it isn't going away any time soon.

As long as there are SMEs determined to avoid paying their VAT in full, HMRC will keep investigating. In fact they have set up two specialist teams to deal with the issue, the Individuals & Small Business Compliance unit, and the Wealthy & Mid-sized Business Compliance unit, bot tasked specifically with investigating SME VAT.

As you can imagine a VAT inspection is a horrible thing to endure: expensive, time-consuming and very worrying. And ignorance of the rules is no defence in HMRC's eyes. It's your responsibility to check that all your sources of income, all the expenses you have claimed and all your capital sales are included in your VAT return.

monthly report - 13 common small business VAT mistakes

It's sensible to get VAT right first time, every time, to prevent even minor mistakes from turning into nightmares and avoid hefty fines. To help you do that, here's a list of 13 of the most common VAT mistakes made by SMEs.

13 common VAT mistakes made by SMEs

  1. Not registering to pay VAT in time - You should register within 30 days when your VAT taxable turnover is more than £83,000 over a 12 month period, you accept goods from the EU worth more than £83,000, you expect to go over the threshold in any one 30 day period, or you've taken over a business that is already VAT registered
  2. Getting your travel expenses wrong – It's a hot topic with HMRC right now. If you want to deduct travel expenses from your taxable income, that travel has to be 100% for business reasons. But there are exceptions around people working from home. For some of them who travel to and from the home, whether or not they have a home office, VAT might not actually be deductible
  3. Putting the wrong numbers into box 6 of your VAT return – Make sure you use the correct numbers based on the way you pay VAT: either the VAT cash accounting scheme, VAT standard (normal) accounting scheme or the VAT flat rate scheme
  4. Using the incorrect flat rate % - It helps to get your rate reviewed before you complete your VAT return
  5. Picking the wrong VAT scheme for your business – To avoid this, make sure you understand the differences and choose the appropriate scheme
  6. Remember that you can't claim back VAT on entertainment unless you are entertaining your own employees
  7. It's very unwise to split your business into two to spread the VAT load, since it's something HMRC sees as tax evasion
  8. Claiming VAT on personal expenses just isn't worth the risk
  9. Forgetting to account for VAT is common where it concerns management charges, the disposal of business assets, cash sales, sub-contractor charges for using vans and tools, sales of scrap, staff supplies, restaurant service charges, bartering and more – to get it right you need to familiarise yourself with exactly what is accountable
  10. Getting VAT on cars wrong – When you buy a car outright, you can't recover any VAT at all. If you lease or hire a car 50% of the VAT is usually recoverable. It's very rare indeed to be able to claim back all the VAT on a car purchase unless there's no way you'll be driving it for private use
  11. Getting fuel wrong – You can't claim the full cost of fuel if your car is used privately without restrictions or without charging VAT via the fuel scale charge
  12. Getting the employment status of casual or freelance workers wrong – While you might assume someone is self-employed, HMRC might disagree – like so much to do with VAT, it isn't as simple as you might think
  13. Not giving enough evidence to support your claims – HMRC are very strict on this matter - remember, if you can't produce a VAT receipt, you can't claim

pencil and calculator - 13 common small business VAT mistakes

This is just the tip of the iceberg. There are plenty more ways in which small business owners fall foul of HMRC's VAT regulations. Paying attention to the fine detail and making yourself familiar with the entirety of the nation's VAT structure will help you avoid the pitfalls. But do you have the skills, the inclination and the time to do so? If not it makes a lot of sense to hand over to the experts.

Hand your VAT matters over to the experts

There's a lot to think about, and the British tax system isn't exactly the simplest thing to grasp. If you don't want to risk getting it wrong, you could simply hand your VAT matters over to us. As VAT experts, it's our job to make sure you pay exactly what you owe HMRC, no more and no less. Then you can relax and enjoy doing business.

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