4 Common VAT Errors and How to Avoid Them
Even though VAT rules and regulations may appear to be quite complicated, once you get the basics right, the process is quite straightforward.
With over 600,000 businesses registering for VAT every month, it is one of the largest sources of revenue for the Government. Scores of responsibilities are associated with it. So, it is crucial to recognize the areas where you can wrong and get the technicalities in order. There are certain areas related to VAT transactions where you can make mistakes if you are not careful. These errors can generate strict penalties.
In this article, we are going to address some of these problems and present solutions on how to avoid them.
- Reclaiming VAT on Non-Redeemable Items
It is common knowledge that if the goods and/or services your business sells are exempt from VAT, you cannot reclaim VAT on the purchases of these items. Additionally, you cannot reclaim input VAT on:
- The purchase of personal items.
- Entertainment expenses of your business.
- Any free accommodation provided.
- Other employee supplies like company cars or fuel etc.
However, VAT can be reclaimed only on certain employee supplies that include:
- Expenses incurred as employee’s sustenance while travelling for business purposes.
- The cost of business mileage provided to employees.
- Charges for free meals.
- Staff entertainment costs incurred for business purposes.
Once your business’s VAT registration is complete, it is important to have a complete idea about the following:
- VAT rates on taxable items
- Items that are exempt from VAT
- Items that are outside the scope of VAT
2. Submitting Invalid VAT Invoices
Submitting incomplete or invalid VAT invoices can result in grave problems. It not only leads to late VAT returns, but can also cause penalties. Therefore, it is important to get these right from the very beginning.
The first step is to issue valid VAT invoices for every transaction. A proper VAT invoice should include the following details:
- Invoice number, date and time of supply (also known as tax point)
- Name and address of your business
- VAT registration number
- Details of customer (name and address)
- Names and descriptions of the items purchased along with the quantity and price (excluding VAT) of each and discounts (if any).
- VAT rate levied on each item
- Total amount of goods purchased, including VAT
You should always keep a copy of every invoice you issue or receive. Apart from that, it is also necessary to keep the records of those items that you cannot reclaim VAT on and the ones that are exempt from VAT.
3. Not Maintaining Accurate VAT Records
If your business’s VAT records are not properly organized or accurately maintained, it might incur increased accountancy fees. Keeping a VAT account helps immensely in documenting each of your transactions.
A VAT account comprises two parts:
- The details of input tax for every prescribed accounting period.
- The particulars of output tax for each accounting period.
Each of these also includes any errors or adjustments that are required.
Apart from these two major details, your business’s VAT account must also include the following essentials:
- The amount of VAT that you owe HMRC and the amount that can be reclaimed.
- In case the VAT Flat Rate Scheme is applicable to your business, you should also include the percentage as well as the turnover it is relevant to.
Make sure that you update the VAT account on a regular basis to avoid any mistakes. You can consider doing this yourself or delegating the responsibility.
4. VAT Mistakes in Overseas Trading
The VAT rules that apply to overseas trading are slightly different from the usual ones and might result in confusions and consequent errors if you are not very clear about those. Here’s how it works:
- Usually, no VAT is applicable on the goods that are imported from other European countries.
- Import VAT is levied on the goods imported from outside the European countries. However, this can be reclaimed as input VAT.
- VAT is not charged on the export of goods to other VAT-registered businesses in other European countries.
- VAT does not apply to the goods that are exported from outside the European countries.
Once you understand and avoid these common errors, the entire process of VAT becomes easy to handle.
Contributed by: VAT Registration