Problems with VAT are common, either because a business does not have the right systems in place or because of a specific complication. Serious cash flow crises can also arise if you fail to set aside enough funds to pay your VAT bill. You’ll also need to be ready to deal with any tax enquiries from HMRC.
Fortunately, these kinds of VAT problem are largely avoidable.
Common VAT problems
You can avoid most problems with VAT by making sure you deal with all the paperwork correctly. That means issuing VAT invoices and retaining them from suppliers, keeping proper VAT records, dealing with your VAT returns on time and so on.
Problems with VAT are more likely if your VAT accounting is complicated. Retailers in particular should make sure they are using the right VAT accounting scheme. Other complications that can cause problems with VAT include:
- partial exemption (where you sell some goods or services that are exempt from VAT)
- selling goods or services that carry VAT at different rates (eg standard-rated and zero-rated)
- taking goods for personal use
- gifts and entertainment at work
- company cars and fuel
- property sales and transactions
All of these VAT problems can be avoided by ensuring you have the right VAT systems. You should also use appropriate accounting software and make sure that whoever deals with VAT in your business has the necessary experience and training. You may want to take advice from your accountant or hand over tasks such as completing VAT returns.
It’s important to meet VAT deadlines. Late VAT returns or payment could mean you face a tax penalty.
Problems with VAT mistakes
If you discover you have made a mistake, you must correct it. There is an error reporting threshold of £10,000 or 1% of your total sales (whichever is higher) up to a maximum of £50,000 and also a time limit for how far back you can go to correct any VAT mistakes.
Provided you are within the limits, you can adjust past errors on your current VAT return. You will also need to correct any errors in your VAT accounts. Equally importantly, you should learn from your mistake so you can avoid having the same problems with VAT in the future.
VAT payment problems
Late payments from customers can cause problems with VAT. The VAT you have to pay to HMRC is normally based on when the transaction took place, not when payment was received. So late payments — or worse, bad debts — can cause serious VAT problems.
Provided your turnover is not too high, using the cash accounting scheme for VAT can reduce such problems. Using this scheme, your VAT returns are based on the dates when payments are made and received. Separately, you can also claim bad debt relief for debts that are more than six months old.
Problems with VAT payments can also arise if you have used the output tax (ie VAT you have charged on sales) as a source of finance and are unable to pay the VAT over when it is due. The risk of this kind of VAT problem can be reduced with good cash flow forecasting and control. The annual accounting scheme (where you make pay regular instalments based on your estimated VAT liability) may also help you better manage your cash flow.
If you do think you are going to have a problem with paying your VAT, contact the HMRC Business Payment Support Service on 0845 302 1435 as soon as possible. Like any tax payment problems, you need to take action immediately, rather than hoping it will go away.
VAT inspections and investigations
Whether or not you have any problems with VAT, you will probably face tax enquiries from time to time. These can vary from routine tax inspections to more serious tax investigations if HMRC suspects that all is not as it should be.
You can reduce the likelihood and frequency of tax enquiries by dealing with VAT efficiently. Well-organised VAT records will also make the actual inspection process run more smoothly.
If you do face any sort of VAT enquiry — whether you have problems with VAT or not — you may want to take advice. Depending on the circumstances, it may be worthwhile having your accountant present while an inspection takes place.
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