VAT Errors – Part 2

In this post, which is the second in a series, we look at further common mistakes that arise when businesses prepare VAT returns. As detailed in our earlier post, often the errors repeat themselves again and again and can prove costly to businesses.

More importantly, with a little forethought many of the errors can be avoided. In this post we look at a further 5 common mistakes.

6.VAT on Deposits / Advance Payments– whether you receive deposits from customers, or whether you pay deposits to suppliers you need to make sure you get the VAT rules correct.

As a supplier, it is very tempting to think that you can ignore a deposit and just account for VAT on the full price at the time the sale occurs. This is not correct and the simple rule to remember is that a payment received for the supply of goods or services creates a tax point and VAT needs to be accounted from that payment. Things can get more complicated because if you issue an invoice in advance of payment, the date of issue of the invoice will in most cases act as the tax point for the supply and this will govern the date you need to pay over the VAT. There are still a few cases where a deposit does not create a tax point – the most common is where a security deposit is taken, such as to ensure the safe return of goods you have hired out

As a customer, it should follow that the date you pay a deposit should determine when you are entitled to recover the VAT element. In most cases this is correct, but we would remind readers of the need to have VAT invoices to support the VAT recovery claim.

7.Zero-Rating of Export of Goods– Where goods are exported from the UK the zero-rate of VAT applies. To zero-rate a supply of goods, you must have proper commercial evidence that the goods were physically exported out of the UK within the time limits, which is usually 3 months. Where a supplier does not retain this evidence, the UK tax authorities will assume that the supply was subject to UK VAT and could seek to assess your business.

A common error arises where a sale of goods is made to a non-UK customer, but the goods remain in the UK. In such a case the sale is subject to UK VAT.

8.Recovering VAT Incorrectly– Often the Accounts Payable function will automatically input purchase invoices and assume that VAT at the standard rate applies to the purchase. The accounting system will automatically populate the VAT field with input VAT calculated at the standard rate. Where the supply was not subject to VAT or a reduced rate applied, this results in the incorrect recovery of VAT.

9.Making Tax Digital (MTD)– From April 2022 the MTD rules will apply to all businesses including those whose turnover is below the £85,000p.a. VAT registration threshold.

From this date businesses will be required to maintain digital records of their VAT data, submit VAT returns to HMRC via appropriate software and ensure that all data is “digitally linked” throughout their VAT return process.

If this is likely to be burdensome, certain businesses should probably consider deregistering from VAT.

10.Reverse Charge– Many businesses do not correctly account for the reverse charge rules on services provided by suppliers located outside the UK. The reverse charge applies to most supplies of services where the supplier is overseas. The most common exceptions are where the services are exempt financial services and sometimes land related services e.g., an overseas landlord who is required to charge VAT on rent on UK located commercial property.

For most UK businesses, the reverse charge does not result in a payment of VAT but is merely a bookkeeping exercise. However, HMRC often use a business’s understanding of the reverse charge rules to consider how VAT compliant the business is. It is therefore important to ensure that you account for the reverse charge correctly.