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6 Costly & Common VAT Mistakes and How to Avoid Them

VAT is an essential procedure for any business, which brings lots of confusion. There are several technical details and lots of wise decision making. As a result, many businesses and companies make some common and costly mistakes. 

So, if you’re new to VAT, lend this work to an expert and learn from some of the past mistakes people make. Fortunately, this article covers all the costly and common VAT mistakes you can avoid. So, dive in to know how you can prevent them. Let’s have a look!

1. Not Double Checking the Figures

It’s one of the most common mistakes that can cost you more and trouble you a lot. The most frequent mistake is entering incorrect data in Box 6 of the return. Instead, the value should be “total values of sales and all other outputs excluding the VAT”

You must double-check box six 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’re using the cash accounting scheme, then the net income (net of VAT) goes in box 6

For example, you have registered for the Flat Rate Scheme and the income, including VAT, for the three months is 48,000, and the percentage is 14.5%.  Box 6 will have £48,000 and box 1 will have £6,960 (14.5% x £48,000). 

Similarly, for the business or any company using standard or cash schemes, box six will be a net VAT of £40,000, and box one will include £8,000. You can avoid these errors by double-checking and knowing your scheme properly. Carelessness can cause you heavy bucks.

2. Adopting the Wrong VAT Scheme

Multiple VAT schemes imply that they suit different businesses and organisations. It’s not a hard and fast rule for small businesses to only adopt the Flat Rate Scheme. For example, if you have many expenses, you can choose the Cash Accounting Scheme. VAT Scheme

Similarly, a Flat Rate Scheme simplifies accounting for small businesses as it delivers cash flow savings. So, whether a small or large business, you must compare the scheme according to the nature of your business. 

To avoid all these hassles, you can hire skilled VAT professionals who handle all your VAT returns. They provide the best assistance, and you can peacefully focus on your work. However, VAT return is a complicated process, and it will take some time to adapt to this important process. So comparing and discussing all the VAT schemes will avoid all the mistakes.

3. Reclaiming Without Evidence

Do you know you must store VAT receipts and proof for around six years? One of the biggest mistakes VAT returns make is not keeping the record. HM Revenue & Customs inspection can ask you to produce the VAT receipts for the claimed VAT.

HMRC is very strict and can ask for receipts anytime to reclaim anything. For articles under £250, you may not obtain a ‘full’ VAT invoice. However, you will always be required to keep whatever receipt you get.

So, the trick is to manage all your bills, receipts, documents and proofs. Store them physically, in the cloud or on electronic devices. It will save you lots of hassle. So, keep them organised and ready such that you can access them anytime.

Read Also Legal Ways to Reduce VAT

4. Using Flat Rate Scheme Beyond Expiry Date

The Flat Rate Scheme offers a 1% reduction off your industry percentage in the first year for small businesses. But one of the common mistakes people make is using it past its expiry. For example, the reduction expires on the same date after a year of VAT registration and not the anniversary of your joining the scheme.

Depending on the software you use for filing VAT returns, they constantly alarm you about the expiry. However, using the Flat Rate Scheme benefits over its duration can cost you money and many legalities.

5. Not Rightfully Reclaiming VAT on Fuel, Cars and Entertainment

Yes, you can reclaim the VAT on fuel, cars and entertainment but not at the cost of personal use. For example, HMRC demands full details of the mileage record and other documents.

Businesses often use the vehicles for both personal and professional use. One of the best ways is to lease a car. However, only 50% of the VAT charged on a lease car is recoverable, and you’ll need to defend your claim with your supplier’s bills. 

Also, if you’re throwing parties for your clients, you can’t reclaim the VAT. On the other hand, if you’re having a party with your staff, you can reclaim it. Certain businesses require client hospitality, but you can’t reclaim that in your VAT. So, be honest and use vehicles solely for business purposes. Also, you can reclaim the spending on entertainment for working professionals within the business.

6. Claiming VAT on Insurance

It is again one of the most common mistakes some business owners make. Claiming VAT on insurance payments is wrong and can cost you lots of time and bucks. There are proofs and sections filled up with Insurance reclaims in the VAT returns. Business owners especially take up their time to mention each detail. But it’s a waste of time.

Insurance is VAT exempted, and claiming VAT on it is wrong. Many types of Insurance have tax liabilities, but it’s not VAT. So, if you notice a 20 % VAT claim on Insurance in your form, remove it. It will be a reason for rejection and will take up your time. 

Let’s Wrap it

VAT return is surely a very complicated but mandatory procedure. A stamp of VAT makes your business trustworthy and makes you stress-free. Of Course, you can leave this important task to a professional team so that you can focus on work. Always read all the guidelines of HMRC and know what’s right for you. Stay honest and file a successful and timely VAT return always.

Read: Important VAT Advice and Tips for Small Businesses

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