Top 10 VAT Return Mistakes Small Businesses Must Avoid

That little VAT slip-up could set your business back a lot. For small business owners, VAT might just look like another form, but making mistakes can bring penalties, interest fees, or even a check-up from HMRC.

Lots of business owners mess up without knowing, but these slip-ups are easy to dodge. The good news? If you know where people usually trip up, you can keep your business safe, save some money, and not feel so stressed!  Research shows that VAT compliance can actively shape small business behaviour, with firms sometimes slowing growth or misusing VAT funds due to confusion or cash flow concerns (IMF, 2024; Ndlovu & Schutte, 2024).

Here are 10 common VAT return whoopsies small businesses make and how not to make them.

1. Incorrectly Classifying Goods and Services

Misclassifying the rate of VAT on goods or services is one of the most frequent errors. Certain products may have a standard rating of 20%, a reduced rating of 5%, or an exemption. For example, most food items for human consumption are zero-rated, while other items may require standard VAT. Misclassification may lead to either an overpayment or an underpayment of VAT.

Tip: Maintain a clear record of your products and services and regularly check HMRC’s VAT guidance to ensure correct classification. Errors can be avoided and time can be saved by using accounting software that highlights items with incorrect rates.

2. Failing to Keep Accurate Records

Businesses must maintain thorough VAT records, including invoices, receipts, and credit notes, according to HMRC regulations. It can be challenging to prepare accurate VAT returns when records are missing or incomplete. A lot of small businesses don’t realise how important it is to have organised records, which can result in errors or audits.

Tip: Keep a consistent filing system for all VAT-related documents. Digital records are acceptable and frequently simpler to handle. Make sure each invoice has the correct rate, date, and VAT registration number, among other essential information.

A study by Ndlovu & Schutte (2024) found that many small business owners mishandle VAT because records were incomplete or poorly organised.
(Source: Understanding the challenges encountered by small business owners regarding value-added tax compliance)

3. Missing the VAT Registration Deadline

Some small businesses delay registering for VAT because they are unsure if they meet the threshold. Any company in the UK that has a taxable turnover of more than £90,000 is required to register for VAT. Failing to register on time can lead to penalties and backdated payments.

Tip: Monitor your turnover closely. Register as soon as possible if you’re getting close to the threshold to avoid penalties and interest. Small businesses can profit even from voluntary registration since it enables them to recover VAT on purchases.

4. Not Reconciling Accounts Before Submitting VAT Returns

Submitting VAT returns without reconciling accounts is risky. If purchases or sales are missing, duplicated, or misentered, your VAT liability may be incorrect. Small errors, such as entering figures from the wrong period, can add up.

Tip: Reconcile your accounting records at least monthly. Compare your sales, purchases, and invoices with the amounts entered in your accounting system to ensure accuracy before submitting.

SMEs globally report similar reconciliation mistakes, showing that regular review is crucial to avoid errors (JOTA, 2022).

5. Claiming VAT on Personal Expenses

Some small business owners mistakenly claim VAT on personal expenses, which is not permitted. Mixed-use items, such as a car used for both personal and business purposes, are closely examined by HMRC, and any VAT claims that aren’t exclusively business-related may be rejected.

Tip: Only claim VAT on expenses directly related to your business. To prevent confusion, keep business and personal purchases apart. If an item is partially for personal use, only claim the business proportion.