Common VAT Mistakes Small Businesses Still Make (and How to Fix Them

Value Added Tax (VAT) can be one of the more confusing aspects of running a business, especially for small business owners juggling many hats. Even experienced business owners can fall into common traps that result in costly errors or HMRC penalties.

If your business is VAT-registered or thinking about it, here’s a guide to the most common VAT mistakes—and how to avoid or fix them.

1. Not Registering for VAT at the Right Time

The mistake: Waiting too long to register. You must register for VAT when your taxable turnover exceeds £90,000 (the new threshold from April 2024) in any rolling 12-month period—not just the calendar or financial year.

Fix it: Track your turnover monthly. If you realise you’ve exceeded the threshold, register within 30 days. Late registration can result in penalties and backdated VAT charges.

2. Charging VAT When You’re Not Registered

The mistake: Some businesses mistakenly add VAT to invoices before they are officially registered. This is illegal and could damage trust with clients.

Fix it: Only charge VAT once you’ve received your VAT number from HMRC. If you’ve charged it in error, you must refund the VAT or correct the invoice.

3. Claiming VAT on Ineligible Purchases

The mistake: Not all purchases qualify for VAT reclaims. Common ineligible items include:

• Business entertainment
  
• Some vehicles and fuel (unless very clearly used 100% for business)
  
• Items used for both personal and business purposes without proper apportionment
  

Fix it: Keep clear, itemised records. If in doubt, check HMRC guidance or speak to an accountant before submitting your return.

4. Mixing Up Zero-Rated and Exempt Sales

The mistake: Zero-rated items (e.g. most food and books) still count toward your VAT threshold and can reclaim input VAT. Exempt items (e.g. insurance, education services) do not.

Fix it: Learn the difference. Don’t assume “0% VAT” and “exempt” are the same—they have very different implications for registration and reclaiming VAT.

5. Forgetting to Include All VATable Sales

The mistake: Missing VATable income such as overseas digital sales, service fees, or commission income.

Fix it: Review all income sources each quarter. If you’ve missed something, amend your return or notify HMRC as soon as possible.

6. Filing VAT Returns Late

The mistake: Missing your submission or payment deadline can lead to surcharges and interest.

Fix it: VAT returns are usually due one calendar month and 7 days after the end of your accounting period. Set calendar reminders or automate submissions using accounting software like Xero, QuickBooks, or Sage.

7. Not Using Making Tax Digital (MTD) Software

The mistake: Since April 2022, all VAT-registered businesses must use MTD-compatible software for digital recordkeeping and filing.

Fix it: If you’re still relying on spreadsheets or manual records, it’s time to upgrade. MTD-compliant software not only keeps you compliant but also reduces errors.

8. Poor Record Keeping

The mistake: Losing receipts, not recording VAT separately on invoices, or failing to log mileage properly.

Fix it: Keep clear, digital records for at least six years. Most accounting software can help automate and organise these records with bank feeds, receipt scans, and invoice tracking.

9. Reclaiming VAT Too Soon (or Too Late)

The mistake: You can reclaim VAT on expenses only once you’ve received a valid VAT invoice. If you reclaim VAT before the invoice date, it’s an error.

Fix it: Ensure your VAT reclaim matches the date of the invoice, not when you ordered or paid. You can go back up to four years to reclaim VAT on purchases made before registration—if conditions are met.

10. Not Asking for Help

The mistake: Trying to handle complex VAT scenarios (like overseas transactions, partial exemption, or reverse charge) without support.

Fix it: VAT can get tricky fast—especially if your business deals with imports/exports, different VAT schemes (Flat Rate, Cash Accounting), or multiple income types. A qualified accountant can save you time, money, and stress.

Getting VAT right is essential for your business’s cash flow and compliance. With a bit of care and the right systems in place, you can avoid the common pitfalls that catch so many small businesses out.

📞 Need VAT support or advice? Our team of accountants are here to help you stay on top of your obligations, maximise your reclaim potential, and keep HMRC happy. Get in touch today for tailored VAT advice.