How to avoid common VAT pitfalls

VAT legislation is complex.

It is important that you’re up-to-date and staying compliant, otherwise you could be faced with additional VAT bills and significant penalties. In this article, we have listed 8 of the most common VAT pitfalls that we see, and how these can be avoided. 

Claiming VAT without a valid invoice

• HMRC requires businesses to obtain a purchase invoice to reclaim any VAT incurred. The VAT invoice must be addressed to the VAT registered company, or a member of staff if it was for business expenses subject to reimbursement. The invoice must show a valid UK VAT number and the costs must be business expenses.
• It is important to note too that if you are VAT registered you must issue valid VAT invoices for the goods or services that you supply. VAT must be charged where applicable and the amounts accounted for as output tax. It is especially important to look into the detailed rules carefully if you feel that a rate of VAT other than 20% applies to any of your goods or the circumstances in which they are sold.

Not applying the correct rules when claiming VAT on motoring costs

• Input tax on the purchase of a car can’t be recovered unless the taxpayer can show that the vehicle is never available for private use. Other than in very exceptional circumstances, VAT can’t be claimed on a car purchase, including if financed under HP.
• It is important to be aware that while VAT is charged on vehicle leasing and contract hire, if the vehicle is a car only 50% of the VAT can normally be reclaimed. There must be some business use of the vehicle to reclaim any VAT. 
• You need to ensure that you are making VAT scale charge adjustments each quarter to reflect non-business use of any car fuel that VAT is being reclaimed on.

Overdue purchase invoices

• You can claim an output tax credit on sales if the invoices are overdue for payment by over six months. However, if you do not pay a supplier for more than 6 months, unless this is within the credit terms agreed with them, you are likewise required to pay back any VAT you have reclaimed on the invoices in question.

Failing to register for VAT when required

• It is important to remember to take the necessary steps to register with HMRC for VAT, otherwise this can result in penalties. Registration must be within 30 days of when the VAT registration turnover threshold has been exceeded.
• VAT must not be charged until you are registered and have a VAT number.

Paying VAT late and not submitting returns by the due date

• From the first day your payment is overdue until you pay in full, HMRC will charge late payment interest. HMRC has also introduced new late payment penalties, starting from 1 January 2023. For further details on this please see this article - https://www.oldfieldadvisory.com/articles/2024/05/616-vat-late-payment-penalties.
• There are also separate penalties for failing to submit your VAT return on time.

VAT claimed on non-VAT items 

• It is important to ensure that you are not reclaiming VAT on costs where no VAT has been charged. Some items are zero rated or exempt, so it is essential to check purchase invoices and only reclaim the VAT specifically shown on them. Any VAT or similar tax charged on an invoice from outside the UK and not displaying a valid UK VAT number cannot be claimed on a UK VAT return.

VAT on entertainment

• Businesses can claim VAT back on entertainment expenses, but it is crucial that this is for staff only. Any entertainment expenses for anyone who isn’t employed by the company is not reclaimable as input tax.

Import VAT

• Input tax relating to VAT on imports can only be claimed if supported by a C79 certificate issued by HMRC. Generally it is better to opt for Postponed VAT treatment on imports wherever possible, rather than paying import VAT.

Do you need any assistance?

Get in touch
VAT is a complex area of taxation. Get in touch with the team at Oldfield via info@oldfieldadvisory.com or call 02476673160 and we will be happy to advise on the best solutions for your business.

Please note: This article is provided for information only and was correct as at time of writing (16/05/23). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance.  No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.