Everybody makes mistakes, however, learning from your mistakes and ensuring that they don’t happen again is what sets businesses apart. Let’s face it, the VAT process can be extremely complex with several schemes and rules. In this article, I will outline some common mistakes when submitting your VAT Return to HMRC.
A VAT Return is a document that UK VAT registered businesses submit to HMRC on a quarterly basis. It outlines how much VAT the business needs to pay, or how much should be reimbursed by HMRC based on their transaction history from that accounting period.
It seems rather simple, however, there are multiple schemes and specific rules based on the nature of your business and the products or services you sell.
If you submit an incorrect VAT Return, you may incur fines from HMRC. Here, I’ll outline some of the most common mistakes made by businesses when submitting a VAT Return.
The most common VAT Schemes
To get started, I’ll quickly outline the 3 most common VAT schemes which will help you understand some of the mistakes made when submitting a VAT Return.
- Standard VAT Accounting Scheme: This scheme records income and expenses once an invoice has been issued, regardless of if payment has been made.
- Cash Accounting VAT Scheme: This scheme reports income and expenditure once payment has been made, rather than when an invoice is created.
- Flat Rate VAT Scheme: This scheme allows a company to pay VAT at a fixed percentage of its turnover, rather than the standard VAT percentage which is higher. This scheme simplifies the VAT process but also does not allow companies to reclaim VAT on certain purchases.
1. Using the wrong VAT Scheme
The reason there are multiple VAT Schemes is that they suit different types of businesses. The Flat Rate Scheme is better suited towards small businesses and makes the VAT process simpler with less paperwork.
Seems great, right? It may work well for your business, however, it is always beneficial to compare the different schemes that your business qualifies for as it may save you money in the long run.
For example, if you are on the Flat Rate scheme and have lots of expenses, it may be more tax-efficient to switch to the Cash Accounting Scheme.
Keep your options open, explore the different possibilities, and choose the best option for your business needs.
2. Entering incorrect data on the VAT Return
As with any accounting documents, it’s important to get the numbers right. A VAT Return has 9 boxes, all conveying different data.
Depending on the VAT Scheme your business uses, you will be entering different data on the VAT Return. It is important to understand the rules of your scheme to ensure the numbers are correct.
For instance, in box number 6 on the VAT Return, you enter the total value of sales excluding VAT if you are on the Cash Accounting Scheme. However, if you’re using the Flat Rate Scheme, you enter the gross amount including VAT.
3. Using the wrong flat-rate
If your business is on the Flat Rate Scheme, the percentage you pay depends on multiple factors including your industry, and business structure.
Using the incorrect percentage can bring you fines as well as backdated VAT if you have not paid enough.
HMRC have also introduced a ‘limited-cost business’ class which incurs a higher VAT percentage under certain circumstances.
It is important to check the current flat rate on a regular basis to ensure that you are paying the correct amount. You can find the current flat-rate percentages on the UK Government website.
4. Not retaining evidence to support your VAT claims
With anything related to your business accounting, you must keep records for at least 7 years. If you do not have sufficient evidence supporting your claims, then you have no claim!
Keep all of your invoices, and expense VAT receipts in a safe place. Invoicing software can help you keep these organised and stored in the cloud.
5. Reclaiming VAT on entertainment costs
In certain industries, taking clients out to dinner helps you win contracts. However, not many people are aware that the VAT on these expenses cannot be reclaimed. HMRC does check this and may block this claim if they notice a receipt for entertainment.
However, there is an exception to this rule. Costs related to employee or director entertainment can be reclaimed in certain circumstances. For instance, if you throw a staff party, the VAT paid on the expenses related to it can be reclaimed as long as you have sufficient proof.
6. Incorrectly recording reverse charge VAT
The reverse charge is a system used when making a purchase from another EU country. In this case, the VAT is recorded by the purchaser rather than the supplier.
If your UK business purchases from an overseas EU business, then you will need to record this on your VAT Return as if you were the supplier.
The VAT will essentially cancel out as you will record both the input VAT and the output VAT on your VAT Return.
7. Claiming VAT twice
Under the Standard VAT Accounting Scheme, this is a common mistake. It may occur because you have recorded the invoice, the statement from the supplier, as well as a proforma invoice.
When you run your report, make sure that you check for any VAT amounts that are the same, and check if they are from the same expense.
8. Not repaying VAT on supplier invoices
When on the Standard VAT Scheme, if you have not paid the balance on a supplier’s invoice for over 6 months, you will need to pay back any VAT recovered by HMRC.
It is the same process if a customer has not paid you for an invoice and is overdue by 6 months. You can reclaim any VAT you have already paid on that invoice.
9. Reclaiming VAT on personal expenses
In this day and age, many people work from home. This may incur extra expenses, or you may use personal utilities for your work.
On that note, you can only reclaim VAT on the business portion of an expense. For example, if you use your home broadband both for business and personal use, you can only claim the business portion. You will therefore have to estimate what percentage is used for business and only submit that amount.
You will need to keep records for your claim, and you are not able to claim for personal expenses.
10. Not using invoicing software to simplify the process
Now you are aware of the many different things that can go wrong with your VAT Return. However, there is a better way - just let invoicing software do all the work for you!
With Debitoor, you can create customised invoices and quotes, record expenses, run accounting reports, and submit your VAT Return directly to HMRC. The system will pick up on any reverse charge transactions, as well as which VAT Scheme you use, and reflect accordingly on the VAT Return.
Every time you record an invoice, expense, or payment, your VAT Return will automatically be updated. All you need to do is review the document and submit it using our integration with HMRC!
Want to give it a try? Sign up to our 7-day trial to start making VAT simple.