5 Common VAT Mistakes – And How to Avoid Them

Recording VAT incorrectly can be a costly mistake. In addition to having to pay any outstanding VAT to HMRC, business owners could also face penalties and interest.

This blog highlights some of the most common VAT mistakes and how to avoid them.

1. Failing to register for VAT on time

Some businesses unknowingly exceed the VAT registration threshold and only realise they should have registered well after the deadline. This can lead to late registration penalties and backdated VAT liabilities. You can find out the current annual registration threshold here.

UK based businesses need to register for VAT if either:

• Your total taxable turnover for the last 12 months goes over the VAT threshold
• You expect your taxable turnover to go over the VAT threshold in the next 30 days

If either of the above are true, you have to register within 30 days of the end of the month when you went over the threshold or by the end of that 30-day period you are due to exceed the threshold.

To avoid missing these deadlines, regularly monitor your rolling 12-month taxable turnover at the end of each month and also look forward 30 days to check if your turnover will exceed the threshold.

2. Incorrectly claiming VAT on exempt or zero rated expenses

It's common to mistakenly reclaim input VAT on expenses related to zero-rated or exempt supplies.

Zero-rated expenses can include items like:

• Protective boots and helmets for industrial use
• Train travel and other forms of public transport

Exempt expenses can include:

• Subscriptions to membership organisations
• Insurance payments

One common pitfall is the purchase of a car. Generally, VAT on a car is not reclaimable unless:

• It's never made available for private use
• The business is a taxi service or driving instructor
• It's for resale or hire

Always verify the VAT status of an expense and ensure you're eligible to reclaim the input tax. Incorrect claims may lead to repayments and HMRC penalties.

3. Using the Wrong VAT Rate

Applying the incorrect VAT rate – such as using 20% instead of 5% – can result in serious accounting issues.

This is especially common in sectors like construction, hospitality, or healthcare, where VAT treatment varies significantly by product or service.

Keep an up-to-date VAT rate matrix and seek professional advice if you're uncertain. HMRC guidance can be difficult to interpret.

4. Aged Debtors

If you've paid VAT to HMRC on a sale that remains unpaid for six months, you may be able to claim it back.

To qualify:

• The invoice must be more than six months overdue
• You must have written off the debt in your accounts

Review unpaid invoices monthly and claim relief where possible. Likewise, if you haven't paid your supplier after six months, you must repay any VAT previously recovered.

5. Not keeping copies of valid VAT invoices

You must retain valid VAT invoices to support your input tax claims. HMRC may allow alternative evidence, but it's not guaranteed.

Before submitting your VAT return, ensure all necessary VAT invoices are on file — and chase any that are missing.

Final Thoughts

VAT is complex. Mistakes can cost time and money — and attract interest and penalties from HMRC.

Author

Zyaad Peertum
Associate Director – VAT & Bookkeeping