Incorrect accounting for VAT returns can be a costly mistake. In our latest blog, we highlight 10 common VAT return mistakes, and advise on how you can avoid these common pitfalls.
- Import VAT
If you are looking to claim input tax relating to VAT on imports, and you don’t use postponed VAT accounting, you are only eligible to recover input tax if you hold the appropriate C79 certificate issued by HMRC. If you don’t have the C79 certificate, make sure you contact HMRC and request it.
- VAT on vehicles and fuel
Input tax on the purchase of a car cannot be recovered unless the taxpayer can demonstrate the vehicle is ‘not available’ for private use, as opposed to ‘not used for private purposes’ – This is an important distinction and it can be difficult to provide proof of this to HMRC.
For leased cars, input tax recovery is restricted to 50% of lease payments.
Another common mistake is claiming input tax on the full costs of fuel when the car is available for private use without restriction or without charging corresponding output tax via the fuel scale charge (if detailed mileage records are unavailable). Fuel receipts will also be requested by HMRC to support the amount of VAT recovered.
- VAT on deposits
If your business requires a deposit from a customer when taking an order, a tax point is created (if receipt of the deposit occurs prior to the issue of a VAT invoice). You therefore need to ensure that VAT output tax is accounted for in the correct period on your return.
- VAT on entertainment
Input tax on client entertainment cannot be reclaimed. Simply taking a client to lunch is classed as ‘business entertainment’ in HMRC’s view, and recovery is therefore blocked.
However, if the entertainment is for employees, including directors of their own company, VAT on expenditure can be reclaimed (assuming the type of entertainment or expense carries VAT).
- Non-VATable items
A common mistake is assuming there is VAT on all business expenses – this is not the case. Take care to check the VAT status of certain expenditure such as food, training, and taxis, and keep in mind which supplies are zero-rated. VAT on expenditure incurred in the EU cannot be claimed on a UK VAT return – a separate EU claim must be made.
- Non-standard supplies
One-off transactions make it easy for the correct VAT treatment on income to be overlooked or misapplied. This can include supplies made to staff, property rental, recharges to third parties and inter-company management charges where VAT is commonly overlooked.
- Aged creditors
You may be aware of bad debt relief rules, but many businesses overlook the opposite end of the relief which requires repayment of any input tax that has been recovered on purchase invoices that are unpaid six months after the due date.
- Supporting invoices
Remember – a valid VAT invoice from a supplier is required to recover input tax. HMRC do allow recovery based on alternative evidence (the level expected is high) and they have the discretion to stop recovery on that basis for future purchases from the same supplier. We would therefore recommend ensuring all missing VAT invoices are chased up prior to submitting the return.
Software such as Dext can be very helpful here – download the app, take a picture of receipts on your phone and it’s ready for processing in your accounting software.
- Services from abroad
Many businesses will receive services from outside the UK, therefore, it is important to note that in most instances you will not be charged UK VAT by your supplier. The UK VAT return, however, will need to account for the VAT on the service in boxes 1 and 4, with the net amount being recorded in boxes 6 and 7. The ‘input tax recovery’ in box 4 is worked out in the normal way, with restriction for normal exemption.
- Double check the figures for your VAT scheme
Do you know if you are on the right scheme for your business? You could be paying more VAT than you need to if you haven’t considered the different VAT accounting schemes which are available.
The most frequent mistake is entering incorrect data in box 6 of the return. This value should be ‘total value of sales and all other outputs excluding the VAT’. It is especially important to double check box 6 while registering for the flat rate scheme, as it should have the gross income to which you’ve applied the flat rate percentage. If you are using the cash accounting scheme, the net income goes in box 6. Know your scheme and double check your figures to avoid costly mistakes.
Arrange a VAT health check
There are a multitude of rules and regulations around VAT in the UK, and it can be easy for businesses to make honest errors which can lead to HMRC enquiries and even penalties. Our VAT health check involves checking a business’s VAT procedures as well as looking into ways to maximise recovery on costs. We will review your records, and if there are any areas of concern, or opportunity, we can help in ensuring your businesses VAT affairs are as healthy as possible.
To book your VAT health check, get in touch with Andy Kirkaldy (01254 604367 / Andrew.kirkaldy@pmm.co.uk) or Rosie Cooper (07787820341 / rosie.cooper@pmm.co.uk).