Common VAT mistakes, and how to avoid them

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The mistakes that cost the most

1. Reclaiming without a valid VAT invoice. A bank statement is not enough. HMRC can disallow the claim, so keep proper invoices.
2. Applying the wrong rate. Not everything is 20%. Some goods are reduced rated at 5% or zero rated, and getting it wrong cuts both ways.
3. Reclaiming blocked VAT. Business entertaining and most cars cannot be reclaimed, however business related.
4. Breaking the digital link rule. Copying figures by hand between spreadsheets can breach Making Tax Digital, which requires a digital trail.
5. Filing or paying late. The points based penalty system adds up quickly, and interest runs on late payments.
6. Getting the VAT period wrong. Filing for the wrong quarter throws the figures out.

Registering late, and paying for it out of your own pocket

The most expensive VAT mistake is not a wrong box on a return. It is registering late.

You must register once taxable turnover for the rolling last 12 months passes £90,000, or when you expect to pass it in the next 30 days alone. Rolling means checked every month, not at your year end. Businesses that only look at the annual accounts routinely discover they crossed the line four months earlier.

The damage is that you owe VAT from your effective date of registration whether or not you charged it. Invoices already issued and paid without VAT still carry it, and unless your customers agree to be re invoiced, the 20% comes out of money you have already spent.

Assuming the Flat Rate Scheme is the simple option

It often is not. If you spend less than 2% of your flat rate turnover on goods, or more than 2% but less than £1,000 a year, you are a limited cost business and your rate is 16.5% of gross takings regardless of what you do. For most consultants, designers and other service businesses with few material costs, that is worse than standard VAT accounting, because you also give up reclaiming input VAT.

Check the limited cost test before joining, and check it again each year. It is applied on an ongoing basis, not once at the start.

Reclaiming VAT you are not entitled to

Three recur constantly.

Entertaining. VAT on entertaining clients is not recoverable. Staff entertaining generally is, within limits.

Cars. VAT on buying a car is blocked unless it is used exclusively for business, which in practice means almost never for a car available for private use. Commercial vehicles are different.

No valid VAT invoice. A bank statement, a card receipt or an order confirmation is not a VAT invoice. Without one showing the supplier's VAT number and the VAT charged, the claim is not supported.

Getting the reverse charge wrong in construction

If you work in construction, the domestic reverse charge applies where your customer is VAT registered, CIS registered, the supply is standard or reduced rated, the work falls within CIS, and the customer has not told you in writing that they are an end user.

Where it applies you charge no VAT and the customer accounts for it. Charging VAT anyway means your customer cannot reclaim it, and you have to unpick it. Not charging it where the customer is an end user is the same mistake in reverse. Get the end user notification in writing and keep it.

Treating Making Tax Digital as a filing formality

Every VAT registered business is in Making Tax Digital, whatever the turnover. Three requirements catch people:

• Records must be kept digitally.
• Returns must be filed from software, not typed into the HMRC website.
• Where figures move between programs they must move by digital link. Copy and paste is not a digital link. Retyping is not a digital link. A formula between cells is.

The soft landing for digital links ended for periods starting on or after 1 April 2021. Penalties run to £400 per return filed without compatible software and £5 to £15 a day for record keeping failures.

Missing returns and payments, and what that now costs

Late returns work on points. One point each, and for a quarterly filer a £200 penalty at 4 points, then £200 for each further late return.

Late payment is charged in stages: nothing within 15 days, 3% of what is outstanding at day 15, a further 3% at day 30, then 10% a year accruing daily from day 31. The familiarisation easing that used to soften the first charge was withdrawn in July 2025, so there is no grace period now. Interest of 7.75% runs on top.

The habit that prevents most of this

Check your rolling 12 month turnover every month, keep the VAT you collect somewhere other than your working account, and do the bookkeeping monthly rather than in the week the return is due. Nearly every mistake on this page is a consequence of looking at VAT four times a year instead of twelve.

Frequently asked questions