Charlotte Reeves
VAT returns are rarely difficult in themselves. What catches people out is the detail: the sale that should have been zero-rated, the receipt still in a coat pocket, the return filed three days late during your busiest week. HMRC does not treat these as harmless slips. A miscoded sale or a missing invoice usually means a correction further down the line, and corrections take time you would rather spend running the business. Here are the mistakes we see most often, and how to sidestep them.
Mixing up zero-rated, reduced-rated and exempt items
These three categories are not interchangeable, and the difference matters twice over: once for the VAT you charge, and again for the VAT you can reclaim.
- Zero-rated (0%) — most food, children's clothing, books, newspapers, new-build homes and public transport. You charge no VAT, but you can still reclaim VAT on related costs.
- Reduced-rated (5%) — domestic fuel and power, energy-saving materials installed in homes, children's car seats and some residential conversions.
- Exempt — most financial and insurance services, education, healthcare and some property transactions. No VAT is charged, and generally no VAT can be reclaimed on your costs unless partial exemption applies.
Charging 20% on something that is zero-rated overcharges your customer and passes money to HMRC that was never yours. Treating an exempt supply as standard-rated creates the opposite problem and can leave you with an under-declared return. If you sell a mix of goods and services, take ten minutes to confirm the correct treatment of each line before you file.
Missing receipts and patchy record keeping
Under Making Tax Digital, your records need to be kept digitally with digital links between the software you use — no retyping figures from one spreadsheet into another. That sounds bureaucratic, but it is far easier than reconstructing a year of purchases after an enquiry.
The practical rule is simple: no valid VAT invoice, no reclaim. A full VAT invoice needs the supplier's name, address and VAT number, an invoice number, the date, a description of what you bought, and the VAT shown separately. For purchases under £250 including VAT, a simplified invoice will usually do. Keep everything for at least six years, and check that invoices are addressed to the right business — a receipt made out to a director personally is not a business input claim.
Late submissions, late payments and penalty points
HMRC now runs a points-based system for late returns. You pick up one point for each return filed after the deadline. Once you reach the threshold — four points for quarterly filers, two for annual, five for monthly — a £200 penalty is issued, and a further £200 for each subsequent late return. Points only expire after a sustained period of filing on time, so a run of late returns can follow you for a while.
Late payment is penalised separately, with a percentage charge applied at day 15 and again at day 30, followed by a daily charge on whatever remains outstanding. Set a calendar reminder for a week before the deadline, file a few days early if you can, and consider a direct debit so the payment goes without you having to remember it.
Choosing a scheme that does not suit you
The flat rate scheme looks appealing until you realise you cannot reclaim input VAT on most purchases — only on capital assets costing £2,000 or more including VAT. If you are classed as a limited cost trader, the 16.5% rate often wipes out the benefit entirely, and many service businesses are better off leaving. Cash accounting, by contrast, is a genuine help if your customers pay slowly, because you account for VAT when the money arrives rather than when you invoice. Review your scheme once a year rather than once a decade.
Claiming VAT you are not entitled to
Some of the most common errors sit here. VAT on client entertaining cannot be reclaimed, although staff entertaining generally can. VAT on buying a car is usually blocked unless it is used exclusively for business, and leased cars only allow a 50% reclaim where there is any private use. Personal spending on a business card must be stripped out, and goods taken for personal use trigger output tax on their cost.
Watch the reverse charge too. Construction services between VAT-registered businesses under the CIS rules mean the customer accounts for the VAT, not the supplier, and services bought from overseas suppliers follow a similar pattern. Getting this wrong inflates both your output tax and your input tax, which HMRC will spot.
A quick pre-submission checklist
- Are the rates right on every sale, including any zero-rated or exempt lines?
- Does every input claim have a valid VAT invoice behind it?
- Have you excluded client entertaining, blocked car VAT and personal spending?
- Are the figures reconciled to your bank account and sales records?
- Have you applied the reverse charge where it is due?
- Is this an error under the correction threshold, or does it need reporting separately?
- Is the return in before the deadline — and the payment arranged?
Work through that list each quarter and you will avoid the vast majority of the corrections we see. If something does not look right, query it before you file rather than after; fixing an error on your own terms is always cheaper than explaining it later.
