Is a flapjack a cake or a biscuit? Does it matter? Well, for VAT purposes the answer is yes because one is zero rated and the other standard rate. It took a tax tribunal to decide that they are standard rated biscuits. Why are we telling you this? Because it is a perfect example of how complex VAT can be.
It is hardly surprising that sometimes people get things wrong. We are human after all.
Here we have put together a few examples of common pitfalls to avoid:
Claiming input tax without a valid VAT invoice.
Entertainment is an area which often causes confusion. VAT on client entertainment cannot be recovered, whilst staff entertaining generally can.
Not registering for VAT at the correct time. If your taxable turnover exceeds the registration threshold of £85,000 in any twelve-month period, you must register for VAT.
VAT is not recoverable any private expenses and, for mixed use supplies such as a mobile telephone, VAT should only be claimed on the business element.
Where goods are exported, this can only be a zero rated export where you have evidence that the transaction has taken place and that the goods have physically left the UK.
You can reclaim all the VAT on road fuel only if your vehicle is used entirely for business. If the vehicle is for both business and personal use, you have three choices:
reclaim all the VAT and pay the correct car fuel scale charge. The annual update in May sometimes gets overlooked.
keep detailed mileage records and claim VAT on fuel you use only for business trips
not reclaim any VAT if your business mileage is so low that the fuel scale charge would be higher than the VAT you would recover
Common Flat Rate Scheme errors include using the wrong percentage and using the 1% reduction for the first year of VAT registration beyond its expiry date. Another common mistake is failing to appreciate that all turnover, including exempt and zero rated supplies, needs to be included when working out the tax due.
It is often difficult to decide what rate of VAT to charge. For example, construction services can be standard rated, reduced rated or zero rated. If in doubt, always ask us for advice.
Input tax sometimes gets claimed twice error. There are two quite common scenarios.
Where payment comes ahead of the VAT invoice the request for payment or pro-forma invoice should make it clear that it is not a VAT invoice. However, the customer might claim VAT on the payment and again when the VAT invoice arrives.
We sometimes see a double claim of VAT where clients are getting to grips with a double entry book-keeping system such as Sage or Xero. Where payments are not matched to an invoice in the book-keeping system this results in not only the purchase ledger being incorrect but also the VAT claim is duplicated.
Where VAT has been claimed on a supplier invoice which has not been paid within 6 months, then the input tax must be repaid. Similarly, where a customer has not paid you 6 months after payment was due, VAT bad debt relief can be claimed.
VAT on non-routine business transactions can be overlooked. Examples would be management charges (if you are not in a VAT group), receipt of reverse charge services (this is where the customer deals with the supplier’s output tax), barter transactions and supplies to staff.
Knowing where errors commonly occur should help reduce the risk of making a mistake. Despite your best efforts, mistakes can happen.
If you find you have made a mistake, we have written a second article this month on how to correct VAT errors which we hope you find useful.
If you have any questions on VAT, please do not hesitate to get in touch.