By Tamara Habberley, Senior VAT Consultant, The VAT People
VAT is an extremely complicated area, and many business owners can feel as if they are entering into the unknown when it comes to calculating their returns. Even the concept of registering your business for VAT has some entrepreneurs confused, as many fail to realise that there is a limit established by HM Revenue & Customs. Combine this with the seemingly endless list of additional rules that must be followed, and many business owners are tempted to sweep VAT under the rug. However, doing so is likely to prove costly.
In this post, we will take a look at the most common issues faced by businesses when it comes to managing VAT. We will offer guidance in a bid to help firms avoid making the most common mistakes, helping business owners to make sense of this confusing aspect of business.
- You put the matter off
A considerable number of businesses struggle with calculating VAT because they leave important tasks, such as those carried out at the end of the tax year, until the very last minute. Putting such procedures off can lead to a number of problems.
On top of this, the longer tasks are put off, the more likely it is that important documents get misplaced, which could leave businesses with a lack of evidence when it comes to their VAT payments.
Issues like these can be avoided by ensuring that VAT is treated as an important aspect of the business all year round. It is essential that files are easy to locate and that deadlines are met throughout the year without rushing. An effective way of ensuring the whole business is tuned into these deadlines is by setting up reminders on the company calendar to ensure dates are not forgotten about.
2) You do not delegate responsibility for VAT
It is incredibly common for business owners to have a good understanding of VAT, but within a firm’s structure, they are unlikely to be the ones who are in charge of the process. Therefore, it is essential to identify a member of the team who will be responsible for the day-to-day dealings with VAT. The owner of the business should ensure this individual has everything they need to be able to make decisions that comply with VAT regulations.
Very often, businesses place this responsibility on administrative employees, or those who process orders and sales. Others ask the financial director to take charge of this area. We often see different individuals across the same business adopt a different approach to how they tackle VAT, which can complicate the issue further. It is always best to roll out a standard procedure for VAT in order to promote consistency across the business.
3) You use the wrong rates
One of the most common mistakes companies make is failure to register. It is important to check whether turnover of taxable goods and services has surpassed the limit of £85,000 in the past year. When sales have reached this limit, firms should register for VAT before submitting a return to HMRC every quarter.
Smaller businesses are sometimes best off selecting the VAT flat rate scheme, which can be the most beneficial approach. This is an alternative way for companies to work out how much VAT to pay to HMRC every three months, and is designed to take some of the strain out of recording VAT sales and purchases.
Firms are not allowed to use the flat rate scheme without agreement from HMRC; therefore, those firms wanting to use it should initially apply to the body. Those enterprises that run the flat rate scheme without permission could incur a penalty for paying too little.
4) You don’t account for entertaining
HMRC outlines that firms are forbidden from recovering VAT on “entertaining” individuals, other than those who are employed by the company. However, it is very common for businesses to claim VAT on meals and other entertainment for customers or prospective clients. Doing so is against VAT regulations, and therefore, firms should approach this area with caution.
5) You fail to think like an inspector
Those directly responsible for VAT should always think like an inspector, and conduct an audit of the organisation’s financial processes in order to test their efficiency in this area. By carrying out an audit, you will effectively highlight any gaps in knowledge among members of staff, while hopefully uncovering any mistakes that continue to be made.
Placing increased focus on VAT can uncover some potentially considerable errors, and very often, the simplest mistakes can cause the most problems further down the line. Carrying out regular checks means this type of mishap can be avoided.
Overall, those businesses taking the time to familiarise themselves with VAT processes are taking active steps to avoid mistakes. This approach means they are extremely likely to remain ahead of the game, avoiding penalties from HMRC in the event of an investigation. While some effort is required to get your business’s VAT dealings in order, the advantages are plentiful and will save you time in the future, giving you the chance to focus more on what really matters.