Here, Jonathan Amponsah, a chartered tax adviser, accountant and founder and CEO of The Tax Guys, shares some common VAT mistakes to avoid and a way of seeing tax returns more positively.
Once your business is VAT registered, there is no escape from the regularity of dealing with VAT returns. To start with, here are the three most common VAT schemes and methods businesses use:
- The standard (or normal) accounting scheme
Here, a business owner pays VAT on sales whether or not your customers have paid. You then reclaim VAT from your suppliers’ invoices even if you have not yet paid the bill.
- The cash accounting scheme
Businesses pay and reclaim VAT based on what they’ve received and paid.
- The flat rate scheme
You charge your customers at the appropriate rate (for example, 20 per cent), and you pay a reduced percentage (say, of 14.5per cent) to HMRC. You are not allowed to reclaim VAT on your expenses.
Eight VAT mistakes to avoid as a small business owner
(1) Supporting evidence is missing
There is one very straight forward rule – no VAT receipt means no claim. Even if you have a VAT receipt, you should double check that the item purchased does carry VAT.
There are apps which let you take copies of your receipts allowing automatic storage in your book keeping system. You need never lose a receipt again.
(2) Making assumptions about which scheme is best
The flat rate scheme delivers cashflow savings to small business owners, and it does simplify the accounting to some extent.
However, it is very important to compare this scheme to, say, the cash accounting scheme and test which is best for your business.
Where a business has a significant amount of expenses it pays VAT on, joining the flat rate scheme may not be tax efficient.
If your business has some exempt income (rental income, for example) you need to be very careful when joining the scheme. This is because you end up having to pay VAT on income that is normally exempt from VAT.
(3) Putting incorrect figures on the VAT return
There is one box on the VAT return form where HMRC picks up many mistakes – box six.
For the flat rate scheme:
(4) Make sure you’ve used gross income to apply the flat rate percentage to
For the cash accounting scheme:
- Use income net of VAT in box six
It is possible you will have other items from box eight which feed into box six. Always take extra care and check that there are plausible reasons for any differences.
(5) Errors relating to non-business use expenses
Where you have expenses, for example broadband, which is partly business and partly personal, you cannot claim VAT on the full amount. Instead you need to apply a restriction on the non-business element of the expense.
A common error is claiming VAT on a motor vehicle which is available for private use. The VAT cannot be claimed except where the vehicle is to be used exclusively for business purposes.
Another VAT mistakes is claiming the full costs of fuel where the car is available for private use without restriction or without charging a corresponding VAT in the form of fuel scale charge.
(6) Claiming VAT twice
This is a common mistake with the normal accounting scheme and occurs when VAT is claimed on the actual invoices as well as the statements or pro-forma invoices.
Do carry out a review of the input VAT and pay particular attention to VAT amounts that are the same. If you can transfer your report onto a spreadsheet, simply sort the items for a quick review.
(7) Not charging VAT on “non-standard business” transactions
Small business owners very often fail to appreciate that VAT needs to be accounted for in the following areas:
- 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 have these type of transactions it may be a good idea to get expert advice.
(8) Ignoring VAT demands and notices
Don’t bury your head in the sand. Ignoring demands and notices from HMRC can be very costly. VAT has more savage penalties than income tax.
(9) Use your VAT return as a reporting tool
Do you know the answers to these questions: Where has the cash to pay the VAT gone? Are you making enough money?
Are you collecting cash fast enough? Do you have a viable business model? The answers are there if your book-keeping is accurate and you treat your VAT return, not as a bit of bureaucracy, but as part of your business’s internal reporting.
Read more about the tax advantages that could create winners and losers amongst the self-employed.
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