VAT is complicated. When you’re busy running your business it’s easy to make VAT errors and not apply the VAT rules correctly.
Sometimes these errors can be costly and if HM Revenue and Customs think you were careless, or worse you deliberately made the VAT errors, then they could charge you penalties ranging from 15% to 100% of the VAT due on top of the tax payable.
To help you negotiate the complex rules of VAT we’ve pulled together the more common VAT errors we see every day when we’re checking accounts or dealing with VAT visits at clients.
1. Record keeping
Poorly maintained records can lead to a number of errors in your VAT.
- Claiming VAT without purchase invoices
- Missing sales from your return
- Duplication of invoices
- Treating net figures as gross or vice versa
- Late filing of returns or late payment
Making sure your bookkeeping is good and maintaining clear and up-to-date records will avoid many mistakes and make completing your returns much easier.
2. Time of supply
Working out what the “tax point” is for a VAT supply is important and HMRC will check that you are charging VAT at the right time.
Often we see mistakes where supplies are made around the end of a VAT quarter and end up in the wrong return.
Other common errors occur where businesses receive deposits for goods or services; and where businesses are using cash accounting for sales and invoice accounting for purchases.
3. Non-standard business transactions
Errors can occur when businesses deal with transactions that are outside their normal pattern of trading. This might be:
- Cash sales
- Incentive or bonus payments
- Property income or expenses
- Intra-company management charges
- Supplies of staff
- Sub-contract payments
- Recharges of expenses
- Asset disposal
- Barter transactions
- Charging the right rate of VAT on new goods or services
- Cross-border transactions
All these have different rules that need to be applied. In the case of cross-border transactions there are different rules depending on whether you are supplying goods or services and whether the supply is within or outside the European Union. The treatment of supplies to or from the EU may change when the UK leaves the EU or subsequently, depending upon what terms are agreed at that time. VAT errors can also apply where you buy goods or services from abroad.
It is always good practice to question any new or unusual transaction to make sure you understand the correct treatment.
4. Credit notes and bad debt relief
We often see errors on credit notes where the original sale invoice hasn’t been posted, maybe because cash-accounting applies, but a credit note is raised and the VAT claimed. Care should always be taken to refer back to the original invoice to make sure the credit note is dealt with correctly in line with the original supply.
The most common error with bad debts is claiming too early. You can‘t claim until after 6 months from the due date. Late payment of creditors can also cause problems where the input VAT has been claimed but payment not made. HMRC will expect you to adjust your input VAT account for any creditor not paid after 6 months from the due date.
5. Business entertaining
In general input VAT on business entertaining cannot be recovered. This can include:
- Food and drink
- Theatre and concert tickets
- Sporting events and facilities
- Entertainment only available to directors or partners of a business
Where supplied to an employee VAT can often be recovered but care needs to be taken. If an employee is entertained with a non-employee the costs can be split and some VAT recovered.
6. Partial exemption
Where a business makes both taxable and exempt supplies the VAT position can be incredibly complex. Detailed advice should be taken to ensure that you are charging VAT on the correct supplies and recovering the VAT you are entitled to.
Common problem areas in partial exemption include:
- Some medical and pharmacy services
- Property income
- Finance and insurance commissions
Unfortunately property is one of the most complex areas of VAT and the one where often the largest amount of VAT is at risk.
- Buying and selling property;
- Construction services and building;
- Letting and rental businesses; and
- Owner-occupying property
All have very complex sets of rules applying to each type of supply. Different VAT rates can also apply to seemingly similar transactions.
We would recommend that advice is sought on any property related transaction to ensure your do not fall foul of the minefield of property VAT. A word of warning, this list isn’t exhaustive and, if you need any advice to avoid making VAT errors you should get in touch and speak to one of our specialist advisers.
There are a multitude of rules and regulations in respect of VAT in the UK, and it can be relatively easy for businesses to make honest VAT Errors, which can lead to significant VAT Penalties or VAT Enquiries.
VAT remains one of the least understood of all taxes, which is why we set up a specialist VAT advisory department, to help guide businesses through the complex maze of VAT legislation. Our team help with all areas of VAT from relatively basic issues such as initial registration, the completion and submission of VAT returns and advice on how to correct errors and mistakes, through to more complex issues such as assessments, control visits, cross border transactions and DIY house builds. Whatever your VAT query; why not get in touch, and discuss any queries you may have with a member of our team.
Other relates articles;
- What is VAT? - A guide to Value Added Tax
- Claiming VAT on Commercial Vehicles
- Transfer of a going concern (TOGC) and option to tax