10 Most Common VAT Return Mistakes
VAT returns can feel straightforward when your records are up to date. You add up the VAT charged on sales, deduct the VAT you can reclaim and report the result to HMRC. However, the rules behind those figures are not always simple.
A small mistake can lead to an incorrect payment, a delayed refund or extra questions from HMRC. Some errors may also result in interest or penalties if they are not corrected.
Below are some of the most common VAT return mistakes businesses make, along with practical ways to reduce the risk.
1. Using the Wrong VAT Rate
The standard UK VAT rate applies to most goods and services. However, some sales may qualify for the reduced rate or zero rate. Others may be exempt or outside the scope of UK VAT.
Choosing the wrong rate can mean charging a customer too much or paying too little VAT to HMRC. Do not rely on what seems suitable based on the product name alone. The correct treatment can depend on the exact item, how it is sold and who buys it.
Check the latest HMRC guidance on VAT rates when adding a new product or service. If the treatment remains unclear, ask an accountant before raising invoices.
2. Confusing Zero-Rated and Exempt Sales
Zero-rated and exempt sales do not have VAT added to the customer’s bill. However, they are not the same.
Zero-rated sales are taxable supplies with a VAT rate of 0%. They still form part of taxable turnover, and a business can normally reclaim VAT on related costs.
Exempt sales sit outside taxable supplies. Businesses that make exempt sales may be unable to reclaim some or all of the VAT on related purchases. This is known as partial exemption when a business makes both taxable and exempt supplies.
Using the wrong code in your software can affect several boxes on the VAT return. Make sure your bookkeeping system separates zero-rated, exempt and outside-scope transactions.
3. Recording VAT in the Wrong Period
VAT must usually be reported in the period that contains the tax point. The basic tax point is normally when goods are supplied or a service is completed. An invoice or payment can change the tax point in some cases.
A common mistake is to report VAT based only on the date money enters or leaves the bank. This may be wrong if the business uses standard VAT accounting. The position can be different under the Cash Accounting Scheme, where VAT is generally linked to payments made and received.
Check which VAT scheme your business uses and apply it in a consistent way. You should also make sure invoice dates are correct before posting them.
4. Claiming VAT Without a Valid Invoice
A card receipt or bank statement does not always provide enough evidence for a VAT claim. HMRC will normally expect the business to hold a valid VAT invoice from a VAT-registered supplier.
You cannot normally reclaim VAT using a pro-forma invoice, statement or delivery note. An invoice should contain the required details, which can vary according to its value and type.
Check supplier invoices before including the VAT on your return. Look for information such as:
- The supplier’s name, address and VAT number
- A unique invoice number
- The invoice or tax-point date
- A clear description of the goods or services
- The net amount, VAT rate and VAT charged
If details are missing, ask the supplier for a corrected VAT invoice.
5. Forgetting Credit Notes and Refunds
A credit note changes the value of an earlier sale or purchase. If it is not recorded, the VAT return may include too much output VAT or reclaim too much input VAT.
Match each credit note to the original invoice. Make sure it is entered in the correct VAT period and uses the same VAT treatment as the original transaction.
Customer refunds should also be reviewed. The correct entry may depend on how the original sale was recorded and when the refund was made.
6. Overlooking Unpaid Supplier Invoices
Under standard VAT accounting, a business may reclaim VAT before paying a supplier. However, an adjustment can be required when the invoice remains unpaid for more than six months after the later of the payment due date or the date of supply.
This rule is easy to miss if old supplier balances are not reviewed. The VAT may need to be repaid to HMRC and reclaimed later once the supplier is paid.
Run an aged creditors report before each return. Check older unpaid invoices and confirm whether an adjustment is needed. Different rules apply under cash accounting because VAT is generally reclaimed when payment is made.
7. Applying the Wrong VAT Scheme
HMRC offers several VAT schemes, including the Cash Accounting Scheme, Flat Rate Scheme and Annual Accounting Scheme. Each has its own rules.
Problems can arise when a business changes scheme but the accounting software is not updated. A business may also use a flat-rate percentage incorrectly or overlook transactions that need separate treatment.
Confirm the scheme being used at the start of each VAT period. Review whether it remains suitable as the business grows or its sales change. An accountant can help you compare the options and understand any conditions.
8. Breaking the Digital Record Chain
Most VAT-registered businesses must keep digital records and submit returns using compatible software under Making Tax Digital for VAT.
Moving figures between systems by copying and pasting can break the required digital link. Manual calculations may be permitted for some adjustments, but the final figure should be entered into the compatible software in the correct way.
Map out how information moves from invoices and sales systems into the VAT return. Use digital links between spreadsheets or software where required, and keep a clear record of any manual adjustments.
You can review the current Making Tax Digital for VAT guidance on GOV.UK.
9. Missing the Return or Payment Deadline
VAT returns are usually due one calendar month and seven days after the end of the accounting period. The payment normally has the same deadline. Different rules can apply to some VAT schemes, so businesses should check the date shown in their VAT online account.
A return must still be submitted if there is no VAT to pay or reclaim. Late returns can lead to penalty points, while late payments may result in penalties and interest.
Set reminders before the deadline and allow enough time to review the figures. If paying by bank transfer or another manual method, check how long the payment will take to reach HMRC.
10. Ignoring an Error After Submission
Finding an error does not always mean you need to replace the VAT return. HMRC has rules for correcting mistakes on later returns or reporting them separately. The correct method depends on the type, value and age of the error.
Do not simply change your records without keeping an explanation. Record what went wrong, how the correction was calculated and when it was made. Review HMRC’s VAT error correction guidance or seek professional advice before making the adjustment.
Acting promptly is important. Deliberately leaving an underpayment uncorrected can lead to more serious consequences.
Get Help With Your VAT Returns
Accurate VAT returns start with clear and complete bookkeeping. Regular checks make it easier to find errors before they affect a submission.
VAT can become more complex when a business has mixed rates, exempt sales, overseas customers or several income sources. Jems Bookkeeping & Accountancy Services provides professional VAT advice and return support for small and medium-sized businesses. We can help you maintain suitable systems, prepare accurate returns and meet HMRC deadlines.
Contact our friendly team to arrange a free initial consultation.
This article provides general information and does not replace advice based on your business’s circumstances. VAT rules can change, so always check current HMRC guidance.
