VAT is simple in principle but tricky in practice. This is important as once your business is VAT registered there is no escape from completing regular, accurate returns.
Here are some mistakes to avoid and help you get your returns correct.
As a reminder the common VAT schemes businesses use are:
- The Standard or Normal accounting scheme. Here you pay VAT on your sales whether or not your customers have paid. You then reclaim VAT from your suppliers’ invoices even if you have not yet paid the bill.
- The Cash Accounting Scheme. You only pay and reclaim VAT based on what you have received and paid.
- The Flat Rate Scheme. You charge your customers at the appropriate rate (e.g. 20%), and you pay a reduced percentage (say 14.5%) to HMRC. You are not allowed to reclaim VAT on your expenses.
- Making assumptions about the “best” scheme
The flat rate scheme delivers cashflow savings to small businesses and simplifies the accounting. However, it is important to compare it to, say, the cash accounting scheme and analyse which is best for your business.
Joining the flat rate scheme may not be tax efficient where a business has significant amounts of expenses it pays VAT on.
You need to be very careful when joining the scheme if your business has some exempt income (rental income). This is because you will have to pay VAT on income that is normally exempt from VAT.
- Not checking the new limited cost trader rules
Many small businesses will be affected by the new VAT status “limited cost trader” which came in on 1 April 2017. It will increase the flat rate percentage for most service based businesses. A limited cost trader is one whose VAT inclusive spending on goods is either less than 2% of the VAT inclusive turnover in a prescribed accounting period, or greater than 2% but less than £1,000 pa for a full prescribed accounting year. The definition of “goods” means they must be used exclusively for the business but exclude capital expenditure; food or drink consumed by the business/employees; and vehicles, fuel and vehicle parts (unless your business is transport). The business will have to account for VAT rate at 16.5% on gross turnover.
You need to assess this very carefully to decide if you are a limited cost trader and ensure your flat rate percentage is reviewed to avoid back-dated VAT.
- Not having supporting evidence
There is one very simple rule: No VAT receipt, No claim. I would go even further and say – if you have a VAT receipt you should double check that the item purchased does carry VAT.
There are apps which let you take copies of your receipts allowing automatic storage in your book keeping system. You need never lose a receipt again!
- Not restricting VAT on non-business use expenses
Where you’ve incurred expenses, for example, broadband at home, which is partly business and partly personal, we often find that VAT has been claimed on the full amount instead of applying a restriction on the personal or non-business element of the expense.
A common error is claiming VAT on a motor vehicle which is available for private use. The VAT cannot be claimed except where the vehicle is to be used exclusively for business purposes.
Another mistake is claiming the full costs of fuel where the car is available for private use without restriction or without charging a corresponding VAT in the form of fuel scale charge.
- Entering incorrect figures on the VAT return
There is one box on the form where HMRC picks up many mistakes. It’s box 6.
For the flat rate scheme:
- Make sure you’ve used gross income to apply the flat rate percentage to.
For the cash accounting scheme:
- Use income net of VAT in box 6
It is possible you will have other items from box 8 which feed into box 6. Always take extra care and check that there are plausible reasons for any differences.
- Not charging VAT on “non-standard” transactions
Businesses often fail to appreciate that VAT needs to be accounted for in the following areas:
- Management charges
- Disposals of assets used in the business
- Cash sales
- Charges to sub-contractors for use of vans or tools
- Sales of scrap
- Supplies to staff – invoiced or by payroll deduction
- Mandatory restaurant service charges
- Recharges of costs to third parties
- Receipt of reverse charge services
- Incentive payments received from suppliers for meeting purchase or sales targets
- Barter transactions
If these type of transactions are relevant to you it may be sensible to get expert advice.
- Ignoring demands and notices
Ignoring demands and notices from HMRC can be very costly. VAT has harsher penalties than income tax so don’t ignore letters from the VATman!
By Jonathan Amponsah, CTA FCCA