Whether you are newly registered for VAT or you have been registered for a while – be aware of these 9 common VAT pitfalls. These are the most frequent errors we see when we are reviewing small business VAT returns.

1. Heavy penalties from failing to plan for your VAT payment

VAT is THE most expensive tax to pay late with escalating penalties of 5%, 10% and 15% of the tax not paid.

Get yourself into the habit of putting that VAT money aside as you raise invoices (accrual basis) or as sales receipts come in (cash basis).

Think about VAT as money you are collecting on behalf of HMRC, it is not yours to spend. It does not belong to you. Do not be tempted to spend it!

Set up a bank account for VAT, and another one for tax on your trading profits. This will be corporation tax if you are a limited company or income tax if you are a sole trader.

Waterfall your incoming cash.

  1. Bank Current Account >
  2. VAT Account >
  3. Business Tax Account

As cash comes in or as you raise invoices and your VAT liability increases, put 20% of the value aside into your VAT account – remember this is not your cash, you are merely the custodian until you have to pay it over to HMRC. You can do this daily or weekly, whichever suits you.  At the end of the quarter, you will work out your VAT liability, which if you have vatable purchases to offset will be much less than the 20% that you have put aside.

Pay your VAT. Set up a Direct Debit so you never forget to make payment – VAT is due 1 month and 7 days after the end of the VAT quarter if paid by BACS or 1 month and 10 days if you are paying by direct debit.

Waterfall the remaining cash into your Corporation/Income Tax account – don’t spend it!!

2. Failing to account for VAT on deposits

An advance payment, or deposit, is a proportion of the total selling price that a customer pays before you supply them with goods or services.

The tax point if you ask for an advance payment is the earlier of:

  • the date you issue a VAT invoice for the advance payment
  • the date you receive the advance payment.

If the customer pays you the remaining balance before the goods are delivered or the services are performed, a further tax point is created when whichever of the following happens first:

  • you issue a VAT invoice for the balance
  • you receive payment of the balance

If you usually raise a single invoice for a sale based on the date of shipment, then you may need to change your process to raise a ‘deposit’ invoice to account for the VAT on the deposit and raise a balancing invoice to account for the VAT on the remainder of the purchase when goods are shipped.

You may ask your customers to pay a deposit when they hire goods from you. You don’t have to account for VAT if the deposit is either:

  • refunded in full to the customer when they return the goods safely
  • kept by you to compensate you for loss or damage

3. Missing out on input VAT recovery due to poor record keeping

Purchase VAT can only be recovered on an invoice or receipt that meets the definition of VAT invoice. The VAT number must be clearly visible on the document.

VAT cannot be reclaimed on an Order, Proforma, Quote, Proposal, Remittance Advice, Delivery Note, Credit Card Slip or where the VAT number is not clearly visible on an invoice or receipt.

Always be sure to ask for the VAT invoice or VAT receipt on your purchases you make for your business.

Lost invoices can often be re-issued by your supplier but lost receipts often can’t be, so if you lose the receipt then you can’t claim the VAT back.

4. Claiming VAT back on personal spends

VAT can be recovered on business spends that are wholly and exclusively incurred for the purpose of the VAT registered trade. The cost must relate to the VAT taxable goods or services that you supply.

If you have bought a TV for your home, you can’t put it through the business and reclaim the VAT on it – this is not allowed as staff or directors entertainment, and buying exercise equipment for your home is not a staff health benefit!! If you work in the film industry and need the TV for your business trade – then it is allowed! If the gym equipment is for your gym and will be used by your clients, then that is also allowed.

If you have bought a PC that is 50% for business use and 50% for personal use, then you may only recover 50% of the VAT based on your business use.

5. Claiming VAT on items with no VAT or Zero VAT

One of the most common errors in a VAT return is claiming VAT back on everything – without considering whether or not the supplier is VAT registered or the supply has VAT on it. Check carefuilly as you post or check the VAT audit report before you submit your VAT return to look for these common errors.

Examples of spends that will never include a VAT element are:

  • Insurance
  • Bank charges
  • Train fares
  • Air travel
  • Payroll
  • VAT, Corporation Tax, PAYE and NI – yes we have seen input VAT claimed on a VAT payment before

6. Claiming the VAT back on customer entertainment

VAT is disallowed on customer entertainment.

VAT is recoverable on staff entertainment and subsistence – but not on client entertainment. It is important to know the difference as they have different rules when it comes to tax.

  • Staff entertainment – the cost of entertaining/motivating staff – there is a taxable benefit in kind if spend exceeds £150 per head per year so track these costs in a separate account – these spends are allowed for VAT.
  • Subsistence – costs of food and drink when you send an employee away from their normal place of work on company business are allowed for VAT
  • Client entertainment – costs of entertaining new, existing or prospective clients and suppliers

The company may still foot the bill of client entertainment but you cannot claim back the VAT on the purchase, and the cost disallowed in your business tax computation at year end.

This is a controversial rule and frustrating for many. HMRC are quite happy to tax you on the income that you might generate from entertaining a client but you cannot recover the VAT on the cost of entertaining them in the process nor can you offset the cost against tax on trading profits.

You still need to keep a record of who you were meeting; when, where and why to prove that this was a genuine business spend and not the company paying for a staff jolly. HMRC might consider the spend to be staff entertainment which could create a benefit in kind tax charge or simply disguised remuneration (personal costs that should have been paid out of after tax earnings) which might create a personal tax charge.

7. Forgetting the VAT restriction on company car hire

Leased company cars are deemed to have a benefit in kind for the employee who drives the company car, because of this there is a 50% reduction in the amount of input tax which can be recovered in respect of lease rental payments on a car.

See: Does the 50% VAT restriction on a car lease effect you?

8. Missing out on the allowable VAT claim on business mileage

If you are using the HMRC Mileage Allowance Payments (MAPs) to reimburse directors or employees for business mileage travelled in their own car – you can recover VAT on the fuel element of the mileage payment. See:

The easiest way to track your mileage is with an App called Tripcatcher which will push your mileage claim into Xero or Receipt Bank.

See: Manage Your Mileage with Tripcatcher

9. Claiming back the VAT on EU purchases

Look out for invoices from EU suppliers that have VAT on the invoice but you can’t recover the VAT.

Examples include: Facebook, Google, Microsoft, Hootsuite.

These suppliers are based in the Republic of Ireland which sits outside the EU and charge Irish VAT that cannot be recovered on a UK VAT return. The invoice may look like any other UK supplier invoice but the supplier is outside of the UK so you can’t treat them in the same way.

See: How to deal with VAT charged by EU suppliers


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Seeking VAT peace of mind? Book a review of your VAT processes and last VAT return. Be VAT ready before your next return is due.



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