VAT can be a tricky tax to deal with even at its simplest level and getting it wrong can be very expensive indeed. Here are a few common problems we find in practice:
1. Not registering on time. For new and growing businesses, it’s very important to register for VAT at the appropriate time. If you’re based in the UK, you must register for VAT within 30 days if:
- Your VAT taxable turnover is more than £83,000 (the ‘threshold’) in a 12 month period or you receive goods in the UK from the EU worth more than £83,000.
- You expect to go over the threshold in a single 30 day period.
- You may also have to register for VAT if you take over a business that’s already registered.
Registering late can be disastrous, because then you must pay over to HMRC what you should have paid from when you should have registered, not counting interest and penalties. Try going back to a customer and asking them for VAT not charged in the first place!
2. Splitting Businesses. For those whose prices are VAT inclusive it’s very easy to think that the VAT is their money rather than belonging to HMRC which means it’s tough having to pay over large sums of money every quarter (which they probably don’t have in any case). It’s tempting then to try and avoid the VAT by splitting businesses down and getting the turnover in each new business under the VAT registration threshold.
Business splitting is like a red rag to a bull to HMRC who take an aggressive approach in combatting what they see as tax evasion. For business splitting to work there must be genuine separation between the businesses e.g. separate trading entities, separate bank accounts and insurance, autonomy of operation and so on. There have been many instances where it just won’t stand up to scrutiny e.g. husband and wife teams operating from the same premises where customers wouldn’t perceive that two different businesses are in operation. Getting it wrong often leads to financial ruin and bankruptcy.
3. Getting VAT returns wrong and letting VAT liabilities build up. More often than not, the errors and mistakes that business owners make when preparing their VAT returns are in favour of HMRC. Whilst these mistakes do and can go undiscovered for many years, it is very common for these mistakes to be discovered by VAT inspectors during routine visits. By the time the inspection takes place, the amount of VAT due to HMRC has often accumulated to alarming
levels and by the time interest and penalties are added the overall amount of VAT payable can break a business. As painful as it may be, it’s best to adjust for any amounts owed at least annually to prevent financial disasters.
4. Claiming VAT on personal expenses. Many business owners claim VAT on personal or non-business expenses, either through wishful thinking on what constitutes business expenses or just taking a chance. Unless your suppliers are prepared to be untruthful on their invoices (which in any case, can be downright stupid given the restricted nature of certain trades) given the need to present all invoices to HMRC during an inspection (unless the amounts are inconsequential) the chances of success are slim!
5. VAT and cars. Given the way that we typically think about cars and the emotion that goes into a car buying decision it is perhaps not surprising that VAT can be a problem because often prospective car buyers convince themselves that they can get a nice discount on the car they are buying which makes it suddenly affordable! Unfortunately, rather than getting a discount, getting the VAT wrong can actually increase the price of the car. There are three typical scenarios:
- No VAT whatsoever is recoverable. This is the case where you are buying the car outright or through hire purchase.
- 50% of the VAT is recoverable. This is the situation where you are leasing or hiring a car (unless the hire is less than 10 days, it’s used only for business and it’s not available for private use).
- All VAT is recoverable. Unfortunately, this is a very rare situation and you can only recover VAT on cars where there is no possibility of private use e.g. taxis, self-drive hire or driving instructor schools. HMRC take it as a personal challenge to disallow all claims for VAT on cars and will pursue you through the courts to the bitter end to deter other optimistic car buyers.
We deal with VAT and VAT returns every day so talk to us about your VAT issues. Even if we charge you it will save you money in the end!