Common Errors on VAT Returns and How to Avoid Them?

What Are the Top 11 Common Errors on VAT Returns & Ways to Avoid Them?

VAT returns can be tough, and even small mistakes can lead to delays, interest, or penalties. Many businesses make VAT errors without noticing at the time. Spotting the common issues early can save time and money later. Below are 11 frequent VAT return errors in the UK, plus simple ways to avoid them.

1. Misclassifying Goods or Services

Many businesses charge the wrong VAT rate. This is called misclassification. Here is why it happens:

• Some items have multiple possible rates.
• Staff are confused by catering and lodging packages.
• Hot and cold foods have different rates.

For instance:

• Hot takeaway food is charged at a normal rate of 20%.
• Takeaway cold food may be 0%.
• Medical supplies and child car seats are charged at the reduced VAT rate of 5%.

Using the wrong VAT rate can lead to VAT being overpaid or underpaid. HMRC may investigate, especially for food and catering, where rules differ for hot takeaway food, cold takeaway food, and eat-in sales under HMRC guidance.

How to Avoid?

Here is how you can correct VAT error:

• Review HMRC VAT guidelines regularly.
• List all items and services with valid rates.
• Changing products? Update your list.
• Consider accounting software for rate tracking.
• Ask a VAT expert if unsure.

2. Incorrect Invoicing

Valid VAT invoices have particular details. Their absence poses problems. Here are some common mistakes:

• No invoice or VAT number.
• Missing VAT rate.
• Incorrect total VAT amount.
• Missing company name or place.

VAT claims and payments might be delayed by errors.

How to Avoid?

Here is how you can avoid such mistake:

• Create VAT-compliant invoices with software.
• Teach staff invoice requirements.
• Check invoices before shipping.
• Hold templates for all goods/services.

3. Late or Missed VAT Registration

VAT registration is necessary for businesses over £90,000 in 12 months. Here’s why such VAT errors occur:

• Businesses rarely track turnover.
• Registration is optional until turnover develops.
• No defined financial year, 12-month barrier.
• Late registration incurs VAT backdates and penalties.

How to Avoid?

Here is how you can correct VAT error:

• Keep track of monthly turnover.
• Alert when VAT threshold approaches.
• Consider voluntary registration for growth.
• Consult an accountant if uncertain.

4. Overclaiming VAT on Expenses

Companies overclaim VAT on costs. This is hazardous and fineable. Here are some common mistakes:

• Client entertainment.
• Items for personal use.
• Uninvoiced VAT items.
• Full business claim for mixed-use commodities.

How to Avoid?

Here is how you can correct VAT error:

• Save VAT invoices and receipts.
• Track VAT on each purchase with software.
• VAT should only be claimed for business.
• Double-check gift and entertainment guidelines.

5. Errors on Imports and Exports

International trade complicates VAT. Post-Brexit mistakes are widespread. Here are some common VAT errors:

• Import VAT accounting delayed due to misunderstanding.
• Missing export zero-rating.
• Incorrect EU sales documentation.

How to Avoid?

Here is how you can avoid such mistake:

• Learn export and import VAT rules.
• Maintain proper import/export records.
• Need help? Ask a VAT or customs specialist.
• Use cross-border VAT software.

6. Failing to Comply With MTD

Making Tax Digital (MTD) requires digital records. Non-compliance leads to fines. Here is why such VAT errors happen:

• Some businesses employ paper methods.
• Staff may not know digital submission rules.

How to Avoid?

Here is how you can correct VAT error:

• Accounting software that supports MTD.
• Teach staff the software.
• Make digital copies of invoices.
• Regularly reconcile records.

7. Late VAT Returns or Payments

Missing VAT deadlines can lead to fines and extra charges.Late submission can build penalty points, while late payment leads to interest and payment penalties.

These issues often happen because:

• Forgetting deadlines.
• Miscalculating payment dates.
• Manual bookkeeping errors.

How to Avoid?

Here is how you can avoid such mistake:

• Mark deadlines in a calendar.
• Use reminders or software notifications.
• Automate payments where possible.
• Submit returns early if you can.

8. Missing VAT Rule Updates

VAT rates and restrictions vary often. Not updating can result in fines and VAT problems. For instance:

• Rate reductions.
• New late submission penalty.
• Export/import rules.

How to Avoid?

Here is how you can avoid such mistake:

• Get HMRC updates.
• Participate in VAT seminars.
• Rules should be reviewed quarterly.
• Ask your accountant for updates.

9. Using the Wrong VAT Scheme

VAT schemes affect VAT reporting. Using the wrong one creates VAT issues. Here are some common schemes:

• Flat-rate plan.
• Accounting for Cash.
• VAT standard accounting.

How to Avoid?

Here is how you can avoid such mistake:

• Review all VAT schemes routinely.
• Quarterly scheme comparisons.
• An accountant can recommend the best VAT scheme or option for the business.
• If cashflow improves, switch plans.

10. Incorrect VAT Calculations

VAT errors are common with manual calculations. Minor mistakes result in large fines. Here are some common mistakes:

• Incorrect totals
• Incorrect VAT amounts
• Rates misapplied

How to Avoid?

Here is how you can avoid such mistake:

• All VAT calculations should use MTD-compatible software.
• Monthly reconcile sales and purchases.
• Check totals before making returns.

11. Claiming VAT Without Proper Evidence

HMRC demands VAT evidence. Missing evidence can defeat your claim. Here are some common VAT errors:

• Lacking invoices.
• Personal cost claims.
• Bad recordkeeping.

How to Avoid?

Here is how you can correct VAT errors:

• Keep paper and digital invoices.
• Use your company name on invoices.
• Sort records by date and vendor.
• Securely back up VAT paperwork.

VAT Error Vs Fix Overview Table

Here is the VAT errors and solutions to overview table: