VAT – the Value Added Tax. It started life as a tax on luxury goods, but today it covers a
huge range of products and services.
It looks straightforward on the surface, but VAT can easily trip you up in practice – especially when you’re newly VAT registered. Here are the most common mistakes we see, and how to avoid them:
1. Missing VAT Registration Deadlines
Cross the £90,000 turnover threshold (as of April 2024) and you must register. The mistake?
Miscalculating when that point is reached. It’s a rolling 12-month total – not just at your year end. Plus, there’s the Future Test: if you know you’ll exceed the threshold in the next 30 days, you must register straight away.
Get registration wrong, and HMRC will backdate your VAT liability and can add penalties.
Example: A consultancy realises too late that it passed the VAT threshold months earlier and suddenly has an unexpected expense, which cannot be passed onto the customers as it is too late.
2. Claiming VAT on the Wrong Expenses
Not everything is reclaimable. Common traps include client entertainment, partial personal use costs (like broadband), and cars. With cars, VAT recovery is generally blocked unless it’s 100% for business use (eg. used as a taxi), or is a lease car (block is 50% for most leased cars).
Example: Buying a car through the company and trying to reclaim the VAT when it’s also used personally, that claim won’t stand.
3. Charging the Wrong VAT Rate
VAT isn’t always 20%. Some goods/services are reduced rate (5%) or zero-rated (0%). Industries like food, construction, and energy are especially tricky.
Example: Children’s clothes should be zero-rated, but many businesses accidentally charge the standard rate.
4. Mixing Up Zero-Rated, Exempt and Outside the Scope
Whilst there is no VAT on any of them, they’re not the same:
- Zero-rated items still go on your VAT return in box 7.
- Exempt items don’t.
- Outside the scope items don’t appear at all.
Example: Children’s books (zero-rated) must be reported. Certain financial services, like insurance (exempt) don’t. Foreign VAT (outside the scope) doesn’t appear either.
5. VAT Return Errors
Small slips – net vs gross mix-ups, forgetting credit notes, or putting numbers in the wrong boxes – can flag you up to HMRC.
Example: Reporting an invoice total including VAT instead of just the net figure.
6. Choosing the Wrong VAT Scheme
Flat Rate, Cash Accounting, Annual Accounting – there are options that can save time and money, but many businesses stick with the standard scheme out of habit.
A business needs to consider which scheme to go on that is best suited to their individua circumstances. Speaking with your accountant, they should be able to present the best option for you.
7. Late Filing and Payment
Since the VAT penalty system changed, late filing adds up penalty points that can turn into financial penalties. Late payment also brings penalties and interest – and with interest rates high, this gets expensive quickly.
Example: Filing just a few days late each quarter racks up penalty points that eventually convert into fines.
✅ VAT doesn’t need to be stressful, but it does need care. Get the basics right and you’ll avoid costly mistakes.
Which VAT issue has been the biggest headache for your business?