By Emma @ YGF
As a fully qualified AAT member, I have been working on VAT for more than 20 years. Despite my experience, like others I’m sure, there are still areas where I need to look a little deeper into the rules for some advice.
In this blog you’ll see me using the word ‘business’. This covers both companies and sole traders. Yes, that’s right, sole traders can also register for VAT! It is a common mistake that sole traders don’t register, and usually happens when they don’t receive the correct advice.
As a bookkeeping professional, I ensure VAT reconciliations and VAT returns are done both monthly and quarterly. Weekly, I reconcile bank accounts to make sure all purchase transactions are entered onto my system. I make sure that all the sales invoices are updated onto the sales ledger. These are simple jobs and can be done in quickly in order to keep your bookkeeping up to date, whether you use an accounting software or a spreadsheet. But if you’re strapped for time, we can help you keep on top of things. Read here for some great benefits to hiring a VA.
VAT is a tax charged at 20% on goods and services deemed to be non-essential. Seems fairly straight forward right? Take a look at the list of VAT Notices on www.gov.uk and it will show you how unclear it can really be!
Here are the 8 common errors made by small businesses and sole traders when it comes to VAT:
- Not registering for VAT within 30 Days
This often slips from your mind when starting a new venture and can sometimes lead to a nasty penalty. Knowing your Registration Threshold is essential and keeping track of your monthly income on a spreadsheet, to flag up when you are getting close to it, will help get a plan in place for your responsibilities.
- Not obtaining a VAT invoice/receipt
HMRC state that VAT can’t be claimed if an Invoice is marked as ‘Pro-Forma / Quote’ or ‘This is not a VAT Invoice’. Today, more and more people are buying products and services online. It could be costing you money if you don’t obtain a VAT Invoice. Getting an email to confirm your purchase is great as evidence for tax purposes, but not to claim back VAT. It’s just as important to make sure an invoice is made out in the name that is registered with the HMRC, whether this is your company name or your own name. Mobile phones are a common spot where businesses make this error.
- Entering VAT Twice
If you produce a pro-forma invoice in addition to the actual invoice, be careful not to duplicate in the VAT return. Duplicating the transaction can lead to overstating/understating the VAT claim and will need to be adjusted in the next VAT return.
- Claiming VAT on Entertainment
If you are in a business where you entertain clients, and would normally include it in your tax return, you need to be mindful with the VAT. It’s not normally possible to claim back VAT on entertainment for clients. However, it may be possible to do so on entertainment for staff and management.
- Part-Business Expenses
If you have expenses where only part is for business use, for example if you work from home and use the home phone line, you need to split the cost that you claim for business use and claim the VAT for the portion only.
- Forgetting to Claim Import VAT
If you are VAT registered and import goods under a VAT registration you will receive a certificate (C79) which tells you how much import VAT the goods have incurred that particular month. I’ve seen these getting filed away and not included in the VAT return. The C79 certificate is proof of import VAT incurred, and you may have an amount of VAT that has not been claimed as input tax.
- Not applying the correct rules when claiming VAT on motoring costs
Motoring costs, particularly those relating to cars, have rules of their own which are different to the usual input VAT claims. It is always worth taking care when following the guidelines. For example, only 50% VAT can be reclaimed for a car on lease, but no VAT can be reclaimed on a car purchase. However, a van purchased purely for your business use will entitle you to claim the VAT in full.
- Road Fuel Scale Charges
If a business is claiming VAT incurred on private fuel, that is - fuel that is not or partly being used for a business purpose, then there are 3 options:
- Do not claim any of the VAT as input tax
- Apportion the VAT between the business and private use per detailed mileage logs (not the easiest method); or
- Account for the Road Fuel Scale charge.
The road fuel scale charge is a set amount that HMRC state, and effectively accounts for the private use on fuel, and adds a relatively small amount to boxes 1 and 6 on the VAT return. The amount to charge is based on the car’s CO2 emissions. This can quite easily be missed when calculating your VAT returns and can be a costly omission if HMRC carry out a visit and assess the unpaid VAT for 4 years.
If a business is claiming VAT incurred on business fuel, that is - fuel used for a business use only, then VAT can be claimed in full.
*There are exceptions to these rules, so please consider your own circumstances when looking into this. The main examples for these exceptions are courier drivers, taxi drivers and driving instructors.
It’s easy to make these small mistakes, which could end up in a big headache for you later on. Why not hire us – an AAT qualified professional with many years’ experience – who can keep on top of your day to day bookkeeping to make life easier. DM us, email us, or submit an enquiry!
If you have any questions with your VAT return, please contact us!
Emma – YGF