Too many businesses falling into VAT traps

2 April, 2025

VAT is complex, and too many businesses are making costly, avoidable mistakes.

Even a simple oversight or misunderstanding can lead to penalties, cash flow problems, and disputes with HM Revenue & Customs (HMRC).

Here are some of the most common VAT mistakes to avoid:

• Charging the wrong VAT rate – Some goods and services have reduced or zero-rated VAT and applying the wrong rate can mean underpaying or overpaying tax.
• Incorrect VAT reclaims – Not all expenses qualify for VAT recovery. Claiming back VAT incorrectly can trigger an HMRC investigation.
• Late VAT returns and payments – HMRC penalises businesses that miss deadlines. In the Spring Statement the Government announced that late payment penalties for VAT taxpayers will increase from April 2025 onwards. Filing and paying on time is essential to avoid these fines and unnecessary scrutiny.
• Missing the VAT registration threshold – If your annual turnover exceeds £90,000, you must register for VAT. Failing to monitor this can result in penalties for late registration.

Additionally, you may need to consider the Kittle principle which allows HMRC to deny VAT reclaims if a business knew or should have known it was involved in a fraudulent supply chain.

Even if a company is not directly involved in fraud, failing to carry out proper due diligence on suppliers can lead to serious financial consequences.

How to stay compliant

VAT mistakes are avoidable with the right approach, so we suggest you do the following:

• Check VAT rates carefully to avoid costly errors.
• Keep track of turnover to ensure VAT registration happens on time.
• Maintain proper records to support VAT claims and submissions.
• Submit returns and pay on time to avoid HMRC scrutiny.
• Verify suppliers to steer clear of fraudulent transactions.

For extra peace of mind, seeking expert advice can help ensure your VAT processes are always compliant.

Protect your business from VAT traps – speak with our team today.