The most common errors on a VAT Return
Posted on 14th Apr 2022
How to avoid making common errors on a VAT Return
There’s no 2 ways about it VAT is complicated.
Yes cloud accounting software, such as Xero and Quickbooks, has made the bookkeeping a whole lot easier BUT even so it’s STILL VERY EASY to make errors on the VAT.
Any error could be costly.
Pay too much VAT and there’s less money in your bank account than there should be.
Pay too little and your cashflow takes a hit when you have to pay over the shortfall AND you could be hit with HMRC penalties ranging from 15% to 100%.
To give you peace of mind that your VAT is being done right here is how you can avoid making the most common VAT errors we see.
1 HAVE THE RIGHT PAPERWORK
To reclaim VAT on a purchase you MUST have a valid purchase invoice from the supplier. It must clearly show the name, address and VAT number of the supplier, the goods and/or services bought & the total amount paid.
In case you were wondering HMRC won’t allow you to use a purchase order, a delivery note, a quote or a credit card chit instead of an invoice.
So you must make sure you keep all your purchase invoices and receipts.
Software such as Dext and Hubdoc can really help here. Just download the app, take a picture of the receipt on your phone and you’re done – it’s ready for processing into your accounting software.
Even if cloud accounting software is being used you must be careful when processing transactions. Just check the VAT code is right when processing the transactions.
Common mistakes include:-
- Processing purchase invoices twice – meaning the VAT is reclaimed twice
- Not overruling the default VAT code in the software
- Not treating customer deposits as a sale and therefore not paying VAT
There is typically no VAT on passenger transport.
That means there’s no VAT included on air fares, train tickets, bus tickets or taxis.
The general rule is that you can’t reclaim VAT on entertaining whether it be entertaining customers, prospective customers, suppliers, etc.
BUT there is one exception to this – staff entertaining – where you can.
A common myth is that staff entertaining is just the Christmas Party. That’s not the case- as long as you adhere to a couple of rules you can have as many events or nights out you like.
In short there’s no VAT on insurance.
It’s not as uncommon for business owners to get Insurance Premium Tax (IPT), mixed up with VAT. IPT is charged on insurance and VAT isn’t.
6 VAT ON SERVICES FROM OVERSEAS SUPPLIERS
Online marketing (such as Google Pay per Click or Facebook Ads) and online software (such as Audible, Adobe or Dropbox) is becoming increasingly common.
Many of the companies providing these services are actually based abroad. Foreign companies should not charge VAT which means there’s no VAT to reclaim.
Before reclaiming VAT always check the purchase invoice and if you’re still unsure ASK your accountant.
7 CAR RUNNING COSTS
If the business reclaims mileage via a mileage claim then, a little known fact, is that there is some VAT to be reclaimed.
A calculation that needs to be done is based on the number of business miles done and the mileage rate (this varies depending on car and fuel type).
Just remember to keep the fuel receipts to prove that you have paid more VAT on fuel than what you are reclaiming.
Sole trader businesses which claim their travel costs by reclaiming a % of all their car running costs (rather than via a mileage claim) can also reclaim VAT.
The sole trader business can reclaim the VAT on any fuel and repairs invoices….BUT don’t forget to deduct the scale charge (this is to cover personal use of the car) and varies depending on the car you have.
If your car was bought on lease and your business is paying the monthly lease payments then
you can only reclaim 50% of the VAT on the monthly lease invoice.
If instead your car was bought either outright or on HP then the rules are different.
You can ONLY reclaim the VAT on the purchase invoice IF there is zero personal use (you must demonstrate that the car is, and can only be, used exclusively for business purposes…which from experience is very difficult).
9 IMPORT VAT
A common mistake is to reclaim the import VAT shown on the freighter forwarder’s purchase invoice. This isn’t right.
Import VAT can only be recovered by a business once it has the C79 Certificate which is the official documentation from HMRC.
10 VAT ON PROPERTY
VAT on property is incredibly complex.
Most land and property sales are exempt from VAT. BUT there are exceptions – one being if a commercial property has opted to tax then VAT will have to be charged on the sales price.
Due to all complexities, the best thing to do is ASK for advice BEFORE you do anything.
11 BE ON THE RIGHT SCHEME
There are a few different VAT schemes – Standard, Cash, Flat-Rate, etc. Given that both your business and VAT rules change, the scheme that’s best for you may also change.
To make sure you are on the scheme that maximises your cashflow we recommend that you check every year which scheme is best for you.
11.5 Most bizarre claim I’ve heard of?
The business tried to reclaim a VAT deduction on the last quarter’s VAT payment.
If you’re reviewing your VAT returns every quarter why not take the opportunity to review the financial performance of your business?
Whilst best practice is to review the management report every month it’s important to review them at least every quarter.
The reason is that your management report will show you how well you’re doing and highlight the areas in the business you need to focus on right now to improve profitability.
By combining your VAT return with meeting your accountant to review your business performance will massively help you improve your profits and get your business to where you want it to be.
If you know of someone who finds VAT difficult why not help them by sharing this article?
If you’d like some help when it comes to your VAT Return then give us a call on 0161 410 0020 or drop us an email to firstname.lastname@example.org