Let’s face it, the UK’s VAT system can be a minefield. That’s why we have written this post to include some of the most common VAT mistakes made by SMEs.
As a business, you can generally claim back the VAT paid on goods and services bought for business use – provided you have a valid VAT receipt. The receipt must include the name, address and VAT number of the supplier, your name and address, the date, a description of the goods or services, the cost before VAT, the VAT payable and the total amount, including VAT. If the VAT amount is not shown, you can work it out by multiplying the total by 20/120.
If the item you buy is also for personal use, you can only claim a proportion of the VAT paid – i.e., the business element.
You can’t claim VAT on:
- Bank interest
- Business entertainment
- Anything bought exclusively for personal use
- Items purchased from VAT-exempt suppliers
Stay in HMRC’s good books
HMRC is cracking down on businesses that underpay their VAT. If you don’t want to ensure a stressful, time-consuming and expensive investigation, make sure you know what you’re doing VAT-wise.
Ignorance about the rules is not a defence in the eyes of HMRC. The onus is well and truly on your shoulders to make sure all your sources of income and all the expenses you have claimed are included on your VAT return.
Most common VAT mistakes made by SMEs
Below are some of the most common mistakes made by SMEs when it comes to VAT.
1. Not registering to pay VAT in time – You must register within 30 days when your VAT taxable turnover is more than £85,000 over 12 months
2. Getting your travel expenses wrong – 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
3. Using the wrong numbers in box 6 of your VAT return – What you use depends on the way you pay VAT: the VAT cash accounting scheme, VAT standard (normal) accounting scheme, or the VAT flat rate scheme
4. Using the incorrect flat rate %
5. Picking the wrong VAT scheme for your business
6. Splitting your business into two to spread the VAT load is seen as tax evasion by HMRC
7. Claiming VAT on personal expenses
8. Forgetting to account for VAT, so familiarise yourself with precisely what is accountable
9. Getting VAT on cars wrong – If you buy outright, you can’t recover any VAT. If you lease or hire a car, 50% of the VAT is usually recoverable
10. Getting fuel wrong – You can’t claim the total cost of fuel if your car is used privately without restrictions or without charging VAT via the fuel scale charge
11. Getting the employment status of casual or freelance workers wrong
12. Not giving enough evidence to support your claims
That list is by no means complete. Our VAT system in the UK is full of exemptions and oddities waiting to trip up unsuspecting business owners. That’s why it’s essential to get to know the fine detail so you can avoid the pitfalls.
Of course, not everyone has the time to get to grips with it, so for added peace of mind, why not hand it over to the experts who can take care of everything for you and make sure you remain on the right side of HMRC.