VAT can be complicated – and with Making Tax Digital for VAT (MTDfV) on its way in April, both clients and accountants will be concerned about whether their accounting processes are fit for purpose.
So, what are the common VAT mistakes that businesses make – and how best to avoid them?
“There are a number of pitfalls to be aware of when preparing your VAT return,” says Helen Adams, Director, HRA Accounting. “The main mistakes I see, when taking over bookkeeping for clients, tend to fall into three key areas”:
- Clients sometimes try to run on both an invoice and a cash basis for reporting VAT. In other words, “they will use cash reporting for the sales, and invoice reporting for their purchases.” This isn’t allowed, Adams explains. “A business must either account for the VAT on one or the other scheme.”
- A business must ensure that the details are correct on both their sales invoices, and the supplier invoices they are claiming the VAT back on. “Supplier invoices should be addressed to the company and have a valid VAT number for the supplier, etc.”
- Businesses can often make errors about where figures should appear in the return. “They can get confused between zero rate, standard rated and exempt purchases.”
Poor record keeping
Many small businesses’ VAT return problems stem from one major error – poor record keeping. Resolving this is probably the single most important thing SMEs can do to make life easier for themselves (and their accountants) when it comes to filing. Some common issues are:
- If you don’t have a VAT receipt, you don’t have a claim. Keep all receipts, and check those receipts are actually claimable.
- Keep records of all sales. And ensure you know the VAT ID of customers.
Reconcile regularly; keep on top of your bookkeeping
Once you are certain your record-keeping is accurate, the following steps should help you make your VAT returns as painless as possible.
- Know what the three reporting schemes are, and choose the one that’s right for your business.
In the VAT Cash Accounting Scheme, “you only pay and reclaim VAT based on the money you’ve actually received and paid,” says Jonathan Amponsah, Founder and Director of The Tax Guys. With the VAT Standard or Normal accounting scheme, “you pay VAT on your sales whether or not your customers have paid. You then reclaim VAT from your suppliers’ invoices, whether or not you have paid the bill.” And in the VAT Flat Rate scheme, “you charge your customers at the appropriate rate (e.g. 20%) but you simply pay over a reduced percentage (say 14.5%) to HMRC. You’re unable to reclaim any VAT on your expenses except on some capital equipment.”
- Put someone in the organisation in charge of VAT.
“Very often, we find that business owners have a great deal of knowledge when it comes to VAT and its associated regulations,” says Tamara Habberley, Senior VAT Consultant at The VAT People. “However, it is very rare that this is the same individual who is in charge of accounting for VAT within their organisation.” To solve this, “identify exactly who will be the person dealing with VAT from day to day, and ensure they have the knowledge and expertise required to ensure the organisation is VAT compliant.”
- Going forward, make sure you have MTDfV compatible software.
This will either be bridging software if you use spreadsheets, or accounting software for electronic end-to-end filing.
Not only are the VAT rules complicated, it’s also essential to keep an eye on updates and alterations. “We have to be constantly aware of any changes being made by HMRC,” says Helen Adams. This is an ongoing issue – “the VAT flat rate scheme changed not long ago and MTDfV means you need to be electronically compliant from April. And with Brexit on the horizon, it’s imperative that we stay on top of legislation so that we report VAT accurately for our clients and can advise them correctly.”
Technology will play a key role here. “By investing in good accounting software, you can be secure in the knowledge that the provider has access to the details of any changes ahead of time and often work closely with HMRC to ensure that their software is compliant to the ongoing changes.” For Adams, “this is also invaluable to businesses because if they have good bookkeeping software – and gain the knowledge to use it properly – it will mean they can have confidence in their financial figures to enable them to drive the business forward with the correct information.”
There are a myriad other problems companies can get into with VAT. Briefly, some of these will include:
- Claiming VAT on entertaining. You can claim VAT back on entertaining employees, but not for clients. (With some particular exceptions on entertaining in order to win work).
- Selling overseas. Each of the EU member states has different rulers on VAT and if you are exporting, discuss with your accountant.
- Claiming VAT on items with split uses, such as cars or phones. You can only claim the proportion that was for business use.
- Getting the ‘tax point’ wrong. Supplies around the end of the tax quarter can end up in the wrong return.
- Entering the wrong figures the tax return – pay especial notice to Box 6.
- Partial exemptions are complicated; in general, talk to an accountant.
- Property is also very complex; in general, do not try this on your own.
- Not realising you are reaching the VAT threshold. If you reach turnover of £85k of taxable turnover during the tax year, you will need to register.
“VAT is one of the most important parts of HMRC’s revenue raising,” says Martin Brown, Director at PKF Francis Clark. According to Aben Bookkeeping, “HMRC collected a whopping £3.4bn extra in VAT under-payments from small and medium-sized businesses during the 2016-2017 tax year, as part of a big crackdown on tax evasion.”
For most small businesses, if your VAT liabilities are relatively straightforward, it is possible to file your own returns. But getting it right is vital. If SMES are unsure, or have complex liabilities, or simply don’t have the time and inclination to plough through VAT returns, the advice is to hand the work over to an expert. The penalties for VAT mistakes are more severe than they are for income tax, and the reputational damage to the business is not worth the risk.
Mark Blayney Stuart is Business Journalist of the Year, Wales Media Awards 2017 and Former Head of Research at the Chartered Institute of Marketing.