It’s a fact – UK VAT is quirky. It would be great if it was a simple equation: VAT you’ve charged your customers – VAT you’ve paid suppliers = Amount due to HMRC.
But no. This is the quirky tax, so quirky it lead to a long court battle to establish whether a Jaffa Cake was a cake or a biscuit – as this affected its VAT status.
Given this it’s not surprising that small business owners often make expensive VAT errors.
Here are some important VAT tips:
1. Which reporting method?
There are three common schemes to calculate your VAT. The Cash Accounting Scheme, the Standard or Normal accounting scheme, and the Flat Rate Scheme (every often used by small businesses). You can read about the differences on https://www.gov.uk/vat-businesses/
You MUST compare the schemes. No one scheme is right for every business.
On the face of it, the flat rate scheme delivers cashflow savings to small businesses and it does simplify the accounting. However, if, for example, your business has a high amount of VAT-able expenses, or has some exempt income (e.g. rental income), it might not be tax efficient to join the flat rate scheme.
No VAT receipt, No claim. Even where you have a VAT receipt, make sure the item you bought does carry VAT.
To avoid losing expenses, use one of the apps that let you take snap copies of your receipts on the go. They’ll be automatically stored in your book keeping system.
3. Poor book keeping?
Keep your records accurate and up-to-date. HMRC tends to look for mistakes in the classification of transactions:
- Has business entertainment been classified as marketing and VAT claimed?
- Has input tax been claimed on expenses which do not carry VAT (such as stamps, train/air/bus tickets, some tolls)?
- Has input tax been claimed on costs incurred outside the UK (for example conference/business trip accommodation and meals)?
- Has self-billed sales invoices on which VAT is due been posted as purchase invoices?
4. Business or personal?
If you’ve incurred an expense, (e.g., broadband at home) which is partly business and partly personal, you cannot claim the VAT on the full amount – only on the business proportion of the expense.
5. Software or human?
It’s good to use technology to save you time but computers can’t do everything. You need to carry out basic checks on your VAT return. Errors such as the computer claiming VAT on wrong items are common and you don’t want HMRC to spot this and start an enquiry.
15. Do you have one of HMRC’s favourites?
HMRC knows that enquiries into the following may generate extra VAT revenue:
- Management charges
- Disposals of assets used in the business
- Cash sales
- Charges to sub-contractors for use of vans or tools
- Sales of scrap
- Supplies to staff – invoiced or by payroll deduction
- Mandatory restaurant service charges
- Recharges of costs to third parties
- Receipt of reverse charge services
- Incentive payments received from suppliers for meeting purchase or sales targets
- Barter transactions
If you encounter any of these, think hard and get advice if necessary. Keep your VAT accurate and up-to-date and will hopefully avoid a costly investigation.