Ensuring you’re on top of your VAT accounting is vital to staying compliant, paying the right amount of tax, and protecting your business’s best interests.
VAT may seem fairly straightforward — it’s a tax charged on non-essential goods and services at 5% or 20%. But, like any tax, the reality is more complex.
In this article, we’ll detail some of the mistakes business owners often make when handling their VAT accounting and how best to avoid them.
What is VAT?
VAT or Value Added Tax is collected any time value is added to a product. As a business, you have to collect VAT on behalf of HMRC when you sell or hire out goods or services. There are some exceptions, such as sales outside the UK, but for most, VAT applies to every sale if you’re VAT registered.
As long as you’re VAT registered, you can reclaim the VAT you’re charged by your suppliers on business expenditures.
So what are some key mistakes to avoid?
Using the wrong VAT accounting scheme
There are four methods for processing VAT accounts:
- standard VAT accounting method. Complying with MTD, you’ll submit your VAT return digitally every quarter using compliant software.
- annual accounting VAT scheme. This is similar to the standard accounting method, except you submit one VAT return yearly and pay quarterly based on what you expect to owe. It can be better for cashflow by making your payments more predictable, but might mean you overpay. You’re not eligible for this if your annual taxable turnover is above £1.35 million.
- flat rate scheme. For this scheme, you simply pay a portion of your turnover as VAT. The VAT rates are different depending on your industry: you can find a list of rates on the Government website. You can only use this scheme if your turnover is below £150,000.
- cash accounting scheme. You account for VAT on the date you’re paid rather than when you send the invoice. This suits small businesses that have slow payers or if you don’t buy lots on credit. Again, you’re not eligible for this if your turnover exceeds £1.35 million.
It can be hard to determine which of these methods best suits your business, so speak to us if you’re unsure.
Failing to register for VAT within 30 days
Even if you’re aware of the VAT turnover threshold, it’s easy to miss the point that you exceed it. This is especially difficult because the threshold applies on a rolling basis: you must register for VAT if your turnover exceeds £85,000 over the last 12 months, not just within a particular financial year. You also need to register if you expect your turnover to go over the threshold in the next 30 days.
Ensure you track your monthly income, seeking advice when you reach the registration threshold. This way, you’ll avoid penalties.
You can also voluntarily register for VAT if this suits your business.
Claiming VAT without a valid invoice
If you don’t have a valid VAT invoice, you can’t claim. Try and do so, and you’ll get a nasty penalty if HMRC does check your records.
The invoice must be explicitly a VAT invoice to count, and your supplier must be VAT-registered. It must contain the business’s name rather than the director’s, too, otherwise it won’t be valid for VAT purposes.
Not applying the correct rules when claiming VAT on motoring costs
Motoring costs, especially car-related ones, have different rules regarding VAT claims. You must pay special attention to these rules.
For example, there is a specific definition for what counts as a car for VAT purposes, and you generally can’t recover the VAT charged on purchasing one, unless it’s considered an ‘excepted’ car by HMRC.
If you lease a ‘qualifying car’ for business purposes, you can usually claim 50% of the VAT.
You can usually reclaim all the VAT on fuel if your car is only used for business purposes. If it’s also used for private purposes, you can either reclaim the VAT and pay a separate road fuel scale charge, or only reclaim the amount you use on business trips. (With detailed records to back up your claim.)
Forgetting about these rules can result in costly errors if HMRC carries out an inspection.
Overdue purchase invoices
You might be able to reclaim VAT on invoices that haven’t been paid, but only if the following conditions are met:
- 6 months or more have passed since the date of the supply or the date the payment was due, whichever is later
- VAT has already been paid to HMRC
- You’ve wiped the debt in your VAT accounts and transferred it to a separate bad debt account
- The value must not be more than the normal selling price
- The debt isn’t factored in, or a similar arrangement
Records of the invoice and a separate bad debt account must be kept for four years after the claim is made.
VAT on property
VAT accounting on property can be difficult to navigate, despite how many brilliant articles and guides you can find online.
The amount of money involved here can easily run into tens of thousands of pounds; from self-builds to companies claiming VAT back on renovations without the option to tax (OTT), oversights here can lead to expensive mistakes.
By having an expert in your corner, you’ll be setting yourself up for success.
VAT accounting is hard, and it’s best not to leave it to chance.
Get in touch to discuss how VAT accounting will affect your business.