1) Overlooking Alternate VAT Schemes
For a small business owner, the Flat Rate VAT scheme offers a lot of appealing benefits. It delivers cash flow savings and it keeps your accounting simple.
Picking this scheme without due consideration may be a costly mistake, though! It should be carefully compared to alternatives like the Cash Accounting scheme.
Any business that pays VAT on a significant portion of its expenses may find the Flat Rate scheme to be less than optimally efficient.
Businesses that receive exempt income, particularly rental income, may also be poorly served by the Flat Rate scheme. In cases like this, you may find yourself paying VAT on income that should be exempt from the tax.
Ensure that you are up to date with the latest VAT news, visit VATIT to read more.
2) Mishandling the Flat Rate Turnover
In most cases, VAT-exempt income is exactly what the term suggests: exempt. It doesn’t need to appear on your VAT return.
But there’s an important exception to that rule you need to take care of with the Flat Rate Scheme. Your VAT return has a space for gross income in Box 6. This should be a sum of all your supplies, exempt as well as VAT-inclusive. Gross income is supposed to include all sources, standard-rated, reduced-rated, and zero-rated.
Depending on the specifics of your business, the Flat Rate scheme may oblige you to pay more VAT than you would with other schemes.
3) Pushing The 1% Reduction Too Far
Joining the Flat Rate scheme for the first time entitles you to take one percent off the industry percentage you use. You’re probably well aware that this is a temporary reduction. The timing can be deceptive, though. You can use the reduction for one year – measured from the date you registered for VAT, NOT the date you joined the Flat Rate scheme.
Not all bookkeeping software will track this detail accurately. You need to double-check the reduction for yourself and confirm that you’re using it properly. This is a very common mistake, and it’s being flagged more and more in VAT inquiries. If you do use the reduction improperly, you may have to pay additional money to cover backdated VAT.
4) Failing to Support VAT Reclaims Properly
It is virtually impossible to claim back VAT if you don’t have a supporting receipt.
You should also double-check the receipts you do have to confirm that you actually paid VAT on the purchased items. There are some exceptions to this rule, but it doesn’t pay to make assumptions about it.
Modern technology can take a lot of the headache out of tracking VAT receipts. Check out any one of the many apps that will let you take snapshots of your receipts with your phone. These can be entered into your VAT records automatically with the right software.
5) Attempting to Reclaim VAT on Non-Business Expenses
An increasing number of small business owners find themselves grappling with expenses that straddle the line between personal and professional. Be careful about reclaiming VAT on such expenses; the proper procedure is to restrict the non-business part of the expense and claim only on the business-related part. If you use your home broadband connection for both work and play, for instance, do not try to reclaim the full value of the VAT you paid on it on your business return.
6) Claiming for VAT on Ineligible Vehicles / Fuel Expenses
All too many businesses try to claim VAT on motor vehicles which are used for both business and private purposes. Businesses can only claim back VAT on vehicles that are used exclusively for the needs of the business. Vehicles which are also used privately are not eligible for claims.
VAT can be reclaimed on fuel costs, but here you have a responsibility to see that fuel expenses for business use are properly separated from private use costs. The fuel scale charge can help keep things straight.
7) Attempting to Claim Back VAT on Client Entertainment Expenses
Spending money to entertain clients is a perfectly acceptable part of doing business in many different industries. If yours is one of them, you must accept that paying full VAT is part of the cost. Claiming back VAT on entertainment expenses is blocked in most circumstances.
If you’re subjected to a VAT inquiry, do not doubt that HMRC will check carefully for entertainment claims. This is another item you should check yourself when reviewing your VAT return. Some accounting software packages mishandle entertainment expenses, and this could get you into trouble.
8) Not Claiming Back VAT on Staff Entertainment Expenses
There is one strong exception to the claim block described in the previous point: You can claim back VAT on entertainment expenses made on behalf of your staff (and/or directors). As long as the specific expenditure carries VAT, you can reclaim it.
9) Trusting Your Software Too Much
By this point, I’ve mentioned at least twice that you need to manually review the VAT accounting handled by your software. I’m strongly in favour of cutting-edge software and time-saving automation, but I urge you to exercise common sense when it comes to leaving everything up to the computer. I’ve helped develop several different tax apps, so trust me when I say the software isn’t always trustworthy.
You still need to take the time to review your VAT return carefully after it’s been prepared by software. Easily-avoidable errors are all too common. Examples include coding expenses to the wrong accounts, duplicating bank transactions, claiming VAT on the wrong items, and more. A little effort expended on double-checking could save you from the avoidable and costly hassle of a VAT inquiry.
10) Classifying Transactions Incorrectly
This is always a fertile area where HMRC can find fault. Examples include:
* Classifying client entertainment as marketing and claiming for VAT
* Claiming input tax on expenses which do not carry VAT (particularly shipping and transportation expenses)
* Claiming input tax on foreign expenses (particularly accommodation and meals on business trips
* Posting self-billed sales invoices as purchase invoices
Review your bookkeeping procedures thoroughly and regularly to make sure you aren’t introducing systemic problems like these.
11) Reclaiming VAT Twice
The VAT Normal Accounting scheme is especially susceptible to this problem: Businesses may erroneously claim back VAT on both invoices and the preparatory statements that precede them.
This is another procedural error you need to ferret out before it causes undue damage. Fortunately, there’s an easy-to-spot red flag. Any VAT amounts that are equal should be scrutinized to ensure you are not double-claiming. You can find these cases easily if your reports can be exported to excel and sorted by value.
12) Neglecting VAT on Services Coming from EU Suppliers
This is where the dreaded “Reverse Charge” and the “Place of Supply” rules rear their ugly heads.
Basically, whenever a UK business buys from an overseas supplier, it’s the UK buyer’s responsibility to account for the requisite VAT on their return as though the business were supplying rather than purchasing.
The reverse charge works like this: Output VAT (i.e. VAT on income) has to be declared in Box 1. The same VAT is to be recovered as input VAT (i.e. VAT on expenses) in Box 4. This accounts for the VAT without changing the business’s overall tax burden.
Rest assured, if it seems like a waste of time to you, you’re not the only one!