Common VAT Errors and How to Avoid Them
VAT compliance can be complex, and mistakes often lead to costly penalties from HMRC. Here are the 7 most common VAT errors we see and practical advice for avoiding them.
1. Incorrect VAT Rate Application
Mistake: Applying the wrong VAT rate to goods or services.
Solution:
- Regularly review HMRC's VAT rate guidance
- Create an internal rate reference guide for your products/services
- Implement checks in your invoicing system
2. Late VAT Returns and Payments
Mistake: Missing submission deadlines or late payments.
Solution:
- Set calendar reminders for all VAT deadlines
- Prepare returns well in advance of due dates
- Consider setting up a direct debit for payments
3. Inaccurate Input VAT Claims
Mistake: Claiming VAT on ineligible expenses or incorrect amounts.
Solution:
- Verify all supplier VAT numbers are valid
- Only claim VAT on business-related expenses
- Maintain proper documentation for all claims
4. Errors in Partial Exemption Calculations
Mistake: Incorrectly calculating recoverable VAT for partially exempt businesses.
Solution:
- Understand the standard and special methods
- Maintain detailed records of exempt vs taxable supplies
- Seek professional advice for complex situations
5. Failure to Account for VAT on Private Use
Mistake: Not adjusting for business assets used privately.
Solution:
- Track private use of company vehicles, phones, etc.
- Apply the appropriate scale charges or actual use calculations
- Document all adjustments made
6. Errors in Reverse Charge Transactions
Mistake: Not properly applying the reverse charge mechanism.
Solution:
- Identify which services fall under reverse charge
- Train staff to recognize these transactions
- Implement system flags for reverse charge items
7. Non-Compliance with Making Tax Digital (MTD)
Mistake: Not following MTD digital record keeping requirements.
Solution:
- Use MTD-compatible software
- Maintain digital records from point of transaction
- Ensure digital links between all systems