Without question, VAT is a complex tax, but many businesses continue to fall into some of the most common (and avoidable) VAT traps.
Even a simple oversight or misunderstanding can have costly consequences in the shape of penalties, wider cash flow problems, and disputes with HM Revenue & Customs (HMRC).
Here are some of the most common VAT mistakes to steer clear of:
- Charging the wrong VAT rate – Some goods and services have reduced or zero-rated VAT and applying the wrong rate can mean underpaying or overpaying tax. We often get asked about the Domestic Reverse Charge for CIS, which can prove problematic for those that don’t fully understand how it applies. VAT should only be charged where you have received appropriate confirmation (i.e., written into the initial contracts) that the customer is a qualifying end user; in all other instances, the customer is expected to self-account for the VAT. The Domestic Reverse Charge can catch some businesses out, leading to unnecessary costs and probing by HMRC.
- Incorrect VAT reclaims – Not all expenses qualify for VAT recovery. Claiming back VAT incorrectly can trigger an HMRC investigation.
- Late VAT returns and payments – HMRC penalises businesses that miss deadlines. In the Spring Statement the Government announced that late payment penalties for VAT taxpayers will increase from April 2025 onwards, and so filing and paying on time is essential to avoid fines and unnecessary scrutiny.
- Missing the VAT registration threshold – If your annual turnover exceeds £90,000, you must register for VAT. Failing to monitor this can result in penalties for late registration.
Additionally, you may need to consider the Kittel principle which allows HMRC to deny VAT reclaims if a business knew or should have known it was involved in a fraudulent supply chain.
Even if a company is not directly involved in fraud, failing to carry out proper due diligence on suppliers can lead to serious financial consequences.
How to stay compliant
VAT mistakes are avoidable with the right approach, so we suggest you do the following:
- Check VAT rates carefully to avoid costly errors.
- Keep track of turnover to ensure VAT registration happens on time.
- Maintain proper records to support VAT claims and submissions.
- Submit returns and pay on time to avoid HMRC scrutiny.
- Verify suppliers to steer clear of fraudulent transactions.
For extra peace of mind, seeking expert advice can help ensure your VAT processes are always compliant. Protect your business from VAT traps – speak with our team today.
