VAT Nightmares and how to prevent them

VAT is one of the most widely paid of all taxes in the UK but also one of the least understood. A tax that is seemingly everywhere but also highly complex presents many risks and challenges. When not adequately dealt with, these can quickly become VAT nightmares, costing businesses money and potentially leading to legal problems.

As the Spooky Season is upon us, let’s delve into the world of VAT nightmares. The good news is that for each of these VAT nightmares, we will be offering advice on how you can resolve these issues or, better yet, prevent them altogether.

Late VAT Registration

Businesses must register for VAT if their total VAT taxable turnover in any 12-month period exceeds the VAT threshold of £90,000 or if turnover is expected to exceed the threshold in the next 30 days. The threshold does not apply to businesses based outside the UK, and such businesses will also need to register for VAT if they supply goods or services to customers in the UK.

VAT registration is essential for businesses that exceed the VAT registration threshold, and failure to register on time will result in fines from HMRC. This fine is determined by how late you registered (the later you are, the greater the fine!) and the VAT owed for this period.

In addition to the VAT that should have been paid, the following penalties will apply.

• Up to 9 months late: 5% of VAT owed
• Between 9-18 months late: 10% of VAT owed
• More than 18 months late: 15% of VAT owed

How to prevent late VAT registration

When growing a business, you can prevent this issue by ensuring VAT is factored into your plans as soon as possible. Understanding when VAT registration will be required and planning your registration well in advance can ensure timely registration. Furthermore, you can opt for voluntary registration when your turnover is less than the £90,000 threshold, ensuring you are already registered once you are eligible.

Late submission of your VAT return

A VAT return is a document that provides details of your sales, purchases, and other VAT-related transactions over a specific accounting period. Submitting accurate and timely VAT returns is a legal requirement for businesses registered for VAT in the UK, and it helps determine the amount of VAT owed to or owed by the company to HMRC.

If your VAT return is submitted late, penalties will be issued by HMRC on a points-based system (new for 2023). Each late VAT return submission results in one penalty point. Once a penalty threshold is reached, you will receive a £200 penalty and a further £200 penalty for each subsequent late submission.

• Learn more about the new penalty system.

Preventing late VAT return submissions

Organisation and awareness of VAT rules and deadlines are crucial to preventing late VAT return penalties. Setting up reminders in a digital calendar (or your accounting software platform, if applicable) can go a long way.

Keeping accurate and up-to-date records of all sales and purchases and regularly reviewing them can also make it easier to prepare your VAT returns before they are due, reducing the risk of late submission.

Last but not least, plan ahead. Do not wait until just before the deadline to submit your VAT return. Ensure you have enough time to gather all the necessary information and make corrections.

Late payment of VAT

A third VAT nightmare relating to lateness is perhaps the most significant. In addition to penalties for late registration and late VAT return submission, late VAT payment to HMRC carries some heavy penalties, too.

These penalties are based on how late the payment is – the later the payment, the stiffer the penalty. Moreover, interest is also accrued, which must also be paid.

The following outlines what penalties can be expected for late payment of VAT:

• Up to 15 days overdue: No penalty is applied if full payment is made (or payment plan agreed with HMRC) between days 1-15.
• Between 16-30 days overdue: 2% of VAT owed
• More than 31 days overdue: 2% of VAT owed on day 15, plus 2% of VAT owed on day 30

A second penalty is calculated at a daily rate of 4% per year for the duration of the outstanding balance.

From January 2023, HMRC is also charging interest from the day a VAT payment is overdue until it is paid in full. This interest is calculated at the Bank of England base rate plus 2.5%.

Preventing late VAT payments

Preventing late payments of VAT is essential to avoid penalties – as described above, these penalties can be damaging. So here are some ways you can keep on top of your VAT payments to reduce the risk of these penalties.

• Monitoring your cash flow and budgeting for VAT payments can help ensure that all funds are available when due. This can help address any financial concerns impacting your ability to make timely VAT payments.
• It is also possible to set up a Time To Pay arrangement with HMRC; this flexible payment plan can mean lower late payment penalties or none at all.
• If you need clarification on the calculations or have a complex VAT situation, consulting a qualified VAT accountant can help you ensure accurate payments.

Errors on your VAT return

So far, this article has focused on the various deadlines that are essential to meet to avoid VAT nightmares; however, another equally crucial aspect of your VAT responsibilities lies in the quality of the VAT returns. Like late VAT registration, returns, or payments, errors in your VAT returns may also result in hefty penalties and interest.

HMRC will carefully and routinely check for errors in VAT returns, including common mistakes like the following:

• Reclaiming blocked input tax, for example, on the purchase of a car or entertaining customers/clients
• Reclaiming VAT on all road fuel purchased without applying road fuel scale charges
• Reclaiming VAT on non-business expenses
• Charging the wrong amount of VAT on sales
• Classifying transactions as exempt or zero-rated when they should be standard-rated
• Failure to account for partial exemption
• Failure to comply with HMRC’s newly introduced Making Tax Digital for VAT requirements

Preventing errors in your VAT returns

Preventing errors in a VAT return is crucial to ensure accurate reporting and compliance with HMRC’s many regulations. Here are some steps to help:

• Make sure you understand as much as possible about which VAT regulations apply to your business
• Try using accounting software to automate calculations, reduce the risk of manual errors, and help you track VAT transactions more efficiently
• Maintaining accurate sales and purchase records and regularly reconciling your VAT records with your financial records to identify discrepancies.
• Make sure all transactions are correctly classified as standard-rated, reduced-rated, zero-rated, exempt, or outside the scope of VAT.
• If your business is partially exempt, calculate the proportion of VAT you can reclaim accurately. Seek professional advice if necessary.

Above all, if your business's VAT situation is complex, or if you’re unsure about specific VAT matters, consult a qualified accountant or tax advisor with expertise in VAT for peace of mind that these VAT nightmares can be avoided.