Managing VAT can be complex, even for well-organised businesses. With changing thresholds, Making Tax Digital (MTD) rules, and stricter HMRC reviews, it’s easy for errors to slip through unnoticed. Unfortunately, those small mistakes can lead to penalties, interest charges, or even compliance investigations.
Here, we explore the most common VAT mistakes business owners make and how to avoid them.
1. Missing VAT deadlines
One of the most common causes of penalties is late filing or payment. VAT returns are usually due one month and seven days after the end of your accounting period. Missing that window can result in:
- Late payment interest
- Points under HMRC’s penalty points system
- Potential surcharges if delays become frequent
How to avoid it:
Use cloud accounting software that tracks deadlines automatically and sends alerts before your VAT return is due.
2. Claiming VAT on ineligible expenses
Not all VAT incurred is automatically recoverable by businesses, and employee expenses often result in over-claimed VAT. Common errors include claiming VAT on:
- Client entertainment
- Personal expenses (such as mobile phones used privately)
- Company cars or fuel not used exclusively for business
- Supplier invoices missing key VAT details
How to avoid it:
Review your expense policy and ensure every claim is backed by a valid VAT invoice. Ensure that different types of expenses such as client entertaining are coded separately to prevent errors. Keep digital copies in your accounting software for audit purposes.
3. Incorrectly recording sales or purchases
Simple data entry errors can quickly lead to underpaid or overpaid VAT. Mistakes often occur when:
- Sales or purchase invoices are entered twice
- VAT codes are misapplied (e.g. zero-rated vs exempt)
- Missing import or export evidence to support VAT treatment
- Purchases are recovered without a valid VAT invoice.
How to avoid it:
Regular training for staff to ensure that they understand when VAT should be applied to sales and when VAT can be recovered on costs. A detailed review of the VAT return should take place prior to submission. Cloud accounting software can support on the review as it will highlight anomalies.
4. Ignoring reverse charge rules
If your business trades internationally or works within sectors like construction, the reverse charge mechanism applies to certain transactions. Many businesses still apply VAT incorrectly, leading to HMRC adjustments later, which may result in interest and penalties if VAT has been claimed incorrectly.
How to avoid it:
Understand when the reverse charge applies. For example, under the Domestic Reverse Charge Mechanism for construction services, VAT is not charged between VAT-registered contractors and subcontractors. Equally for services purchased from overseas, they must be accounted for under the reverse charge mechanism. Always seek advice before issuing or paying invoices in cross-border or industry-specific situations.
5. Failing to update VAT schemes or registration
Businesses often outgrow their initial VAT arrangements without realising. For instance, if you started under the Flat Rate Scheme but your turnover or cost profile has changed, you could be paying more VAT than necessary — or failing to meet scheme conditions.
How to avoid it:
Review your VAT scheme annually, especially as your turnover approaches or exceeds relevant thresholds for schemes. A tax adviser can help you assess whether to switch schemes or if you must leave a scheme.
6. Overlooking digital record-keeping rules
Since the introduction of Making Tax Digital, all VAT-registered businesses must keep and submit records digitally. Manual record-keeping or using non-compliant spreadsheets can result in HMRC penalties.
How to avoid it:
Make sure your accounting software is MTD-compatible and that digital links are maintained between all VAT records. Avoid manual data entry or copy-pasting figures, as HMRC expects a clear digital audit trail. HMRC are focusing on MTD compliance as part of routine inspections and so it is essential that you are compliant.
7. Not reviewing VAT returns before submission
Rushing through submissions can cause simple mistakes that add up. Simple typos or missed transactions are common culprits for VAT underpayments.
How to avoid it:
Always conduct a pre-submission review. Check totals against your accounting system, review expense claims, and ensure all adjustments (like bad debt relief or partial exemption) are applied correctly.
8. Out of date knowledge
The rules around VAT are increasingly complex and evolve as legislation and case law develops. If you are not up to date as the rules change, this can become a costly issue should HMRC subsequently identify an error.
How to avoid it:
Ad-hoc reviews by a VAT specialist can identify errors in your returns and provide a solution for correcting the historic position as well as preventing them in the future. Regular staff training ensures staff are kept up to date with developments for your business and can implement these changes.
What happens if you get it wrong?
If HMRC discovers an error, you could face:
- Interest on underpaid VAT
- Penalties of up to 30% of the error value (more if deemed deliberate or concealed)
- A possible follow up compliance check or audit from HMRC
However, disclosing errors voluntarily often leads to reduced penalties or even complete remission. The way that errors are disclosed has recently changed and so if you identify an error, it is important you disclose this correctly to prevent penalties where possible.
We’ve got you covered
At Haines Watts, our VAT specialists help business owners stay compliant and avoid costly errors. We can:
- Review your VAT processes for risk and accuracy
- Identify reclaim opportunities and correct misclassifications
- Help you transition to or optimise under Making Tax Digital
- Manage communications with HMRC if you’ve made an error
Whether you need a one-off VAT review or ongoing compliance support, our team can help you avoid penalties and protect your cashflow.
Get in touch with your local office today to arrange a VAT health check.
