4 Costly VAT Mistakes Your Business Must Avoid
The VAT (value added tax) system of the United Kingdom is incredibly complicated. Imagine judges in a serious court case having to actually consider whether the Jaffa Cake is a cake or a biscuit! While that sounds ridiculous, it's actually a fact. The 1991 case, between Her Majesty's Customs and Excise and the company McVitie's, was groundbreaking in that it really pointed out the way British taxes can come down to splitting hairs.
VAT Return Mistakes
These are inevitable given how complex things are, especially when it comes to start-ups or small businesses. Unfortunately, even a single mistake can lead to expensive reparations. Aside from paying the wrong VAT amount, a whole VAT investigation will likely get triggered.
Read on to find out about x costly VAT mistakes your business should avoid at all costs:
1. THE MISTAKE: VAT return gets erroneous figures put in
The VAT return has eight boxes that need to be completed. Many people tend to slip up on Box 6. It all lies in whether or not the Flat Rate VAT scheme is at play. This is usually where HMRC, or Her Majesty's Revenue and Customs, finds errors.
People that are on the Flat Rate VAT scheme should apply the flat rate percentage to gross income and put that in Box 6. On the other hand, the Cash Accounting Scheme means net of VAT (the net income) goes into Box 6.
2. THE MISTAKE: Flat Rate turnover is understated
The Flat Rate Scheme makes income exempted from VAT a little more complicated. Box 6 should have gross income that includes exempt supplies' value alongside the VAT-inclusive value of supplies that are zero-rated, standard-rated or reduced-rated.
This means the Flat Rate Scheme can actually lead to paying more for VAT.
3. THE MISTAKE: VAT schemes not being compared
The Flat Rate scheme is much preferred by many business owners since small businesses get cashflow savings and accounting can be simplified. However, it's still worth comparing them to other things like the Cash Accounting VAT Scheme.
Businesses that are heavy on VAT-paying expenses probably shouldn't use the Flat Rate Scheme. It's likely not the best, most tax efficient way of going about it.
On the other hand, businesses with exempt income should take care when the Flat Rate Scheme is in use. Otherwise, VAT might be paid on income that is usually VAT exempted.
4. THE MISTAKE: Wrong flat rate percentage
VAT enquiries from HMRC start at this point. Small businesses will likely trip up here plenty because of the new "limited cost trader" VAT rule. It brings up most service-based businesses' Flat Rate percentage. It's very important to play close attention to one's Flat Rate and get it reviewed. Paying for VAT that's back-dated will likely be pricey and quite a pain in the behind.
The UK's VAT system is so complicated that back in the '90s, there was a case involving identifying pastries. This is why small businesses in particular have to be on top of their VAT game. Avoid costly mistakes like having the wrong flat rate percentage, not comparing VAT schemes and putting erroneous figures in the forms.
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