In this this month’s Finance section, award-winning Chartered Tax Adviser and Founder anc CEO of Tax Guys, Jonathan Amponsah explains the ways in which to recognise avoidable mistakes during tax returns

VAT can be like the maze at Hampton Court. It looks unexceptional on the outside but when you enter it can get very confusing very quickly.  Despite being heralded as a simple tax when it was introduced VAT has evolved and can cause many problems if you are too gung-ho.

As a cautious accountant let me share some of the pitfalls to avoid so that you can complete your VAT returns without mistakes and without the hard work involved in dealing with questions from HMRC.

Falling into the trap of thinking VAT is simple

VAT was sold to us as a simple tax.  You already know that isn’t true. Just the basic facts show this.  There are three rates: standard rate, reduced rate, zero rated. In addition some items are exempt which is different to zero rated.

There are also three different schemes which businesses can use to calculate VAT: The Cash Accounting Scheme, The Standard or Normal Accounting Scheme and The Flat Rate Scheme.  Deciding which scheme is best for your business requires careful analysis and regular review.

Not getting to grips with the new limited cost trader rules

I fear that many small businesses will be caught out by the new VAT status “limited cost trader”. This rule came into effect on 1 April 2017. Essentially it will increase the flat rate percentage for most service based businesses. A limited cost trader is one whose VAT inclusive spending on goods is either less than 2% of the VAT inclusive turnover in a prescribed accounting period, or greater than 2% but less than £1,000 pa for a full prescribed accounting year.  The definition of “goods” means they must be used exclusively for the business but exclude capital expenditure; food or drink consumed by the business/employees; and vehicles, fuel and vehicle parts (unless your business is transport).  The business will have to account for VAT rate at 16.5% on gross turnover.

Official estimates suggest that of the 411,000 businesses using the FRS, 123,000 have limited costs and will be affected by these changes.  Is your business one of them?  HMRC helpfully says: “Businesses using the scheme, or thinking of joining the scheme, will need to decide whether they are a limited cost trader.”  You need to assess this very carefully – ensure your flat rate percentage is reviewed to avoid back-dated VAT.

Mishandling zero-rated items

You may be very happy to have products to sell that have 0% VAT as this appears to make your life easier and, of course cheaper for your customers if you are selling B2C (Business2Customers).  However, it is important to remember is that this means that the VAT rate is currently 0% and you are charging your customers VAT at that 0%.  Is this just semantics?  No because you need to remember to include all those zero rated sales in your vat accounts and included them on your returns.

In addition it’s important to remember that if you have customers who are EU businesses registered for VAT you can apply the 0% rate if they are registered. Please check to make absolutely sure they are registered to avoid problems.

Entering the wrong figures on the VAT return

There are eight boxes to complete. Box 6 can often cause problems depending on whether you’re using the flat rate scheme or not. It’s also the box where HMRC normally picks up mistakes.

If you’re using the flat rate, double check that box 6 is the gross income you’ve applied the flat rate percentage to. If you’re using the cash accounting scheme, then it’s the net income (net of VAT) that goes in box 6.

Always check back to the box 1 figure. For example: you’re on the flat rate scheme and your percentage is 14.5% and your VAT inclusive income for the quarter is £48,000. Your box 6 figure will be £48,000 and your box 1 figure will be £6,960 (14.5% x £48,000).

If you’re using either the standard or cash scheme, then box 6 will be the net VAT of £40,000 and box 1 will show £8,000. Of course, there may be other items and figures from box 8 feeding into box 6, so be very careful to make sure there are plausible reasons for any differences.

Failing to appreciate VAT risk areas 

Whenever you are dealing with transactions relating to any of the following risk areas, it is advisable to get professional help:

  • Land and buildings
  • Property and construction
  • Travel and tour operators
  • Imports and exports
  • Exempt supplies
  • Partial exemption and various schemes
  • Zero rated supplies
  • Charity related transactions
  • Agency and principal transactions
  • Any other transaction where VAT might or might not be charged

Talk to your accountant and if necessary, a VAT specialist.

Getting confused by private-use rules

Where you’ve incurred expenses that are partly business and partly personal (e.g. Broadband at home), a mistake is to claim VAT on the full amount instead of applying a restriction on the personal or non-business element of the expense.

A common error is to claim 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 i.e. not be available for anyone’s private use.

Another error is claiming the full costs of fuel where the car is available for private use without restriction or without charging corresponding VAT in the form of a “fuel scale charge”.

VAT and entertainment

Although in some business sectors, entertaining clients is justifiable in order to win contracts, VAT on these expenses is normally blocked and cannot be claimed back.  During a VAT enquiry, this is one of the areas HMRC will have on their checklist.

There is one exception to the ban on claiming VAT for entertainment. When you entertain staff, including directors of the company, you can claim the VAT on the amount, assuming the type of entertainment or expense carries VAT. You are right – this is one of the quirks I mentioned.

Claiming twice & other book keeping errors

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 get your report into excel, simply sort the items for a quick review.

Other mistakes are often made when transactions are misclassified. For example, input tax is claimed costs incurred outside the UK (perhaps business trip expenses) or business entertainment has been misclassified as marketing.

Forgetting about EC sales list or Accounting incorrectly for EC sales

There are two common mistakes here. If your business supplies goods or services to other EC VAT registered traders, then EC sales lists need to be submitted to HMRC. If you sell goods then the amount of sales to EC customers goes in boxes 6 and 8 of the VAT return so chances are HMRC will pick up the box 8 figure send you a notice to complete an EC sales list.

If you sell services, then it becomes a bit tricky because whilst you include the amount in box 6, you don’t include it in box 8 (the second common error), so you will need to remember to submit EC sales list. This will help avoid penalties and enquiries.

Failing to repay VAT on supplier invoices   

Where VAT has been recovered on purchases from a supplier, if you have not paid this supplier for over six months, you are required to repay any VAT recovered to HMRC. Similarly, where a customer has not paid you for over six months and you’ve already paid VAT on that invoice to HMRC, you can claim that VAT back. If you’re using the standard VAT scheme, do watch out for this during your checks and reviews.

Unfortunately VAT is a complex maze.  For most businesses I recommend having an experienced bookkeeper or accountant to help you. However, if you run a very simple business and enjoy the challenge, you can do it yourself. Just make sure you keep up with any changes and get your returns in on time!