In the hustle and bustle of running a business, it's easy to overlook the finer details – especially when it comes to the nitty-gritty of taxation. VAT is one such essential element that requires keen attention. From setting the right prices to meeting deadlines, proper VAT management can seriously improve your financial health. In this guide, we'll explore our top 7 pitfalls and how to avoid them – as well as a bonus tip!

1: Forgetting to Incorporate VAT into Pricing

It's essential to factor VAT into your product or service pricing: the price paid by consumers might not all be income for your business – a portion of that is likely owed to HMRC. Make sure your pricing strategy accommodates your business’s tax obligations.

For example, if you want to sell a product for £100 and the relevant VAT rate is 20%, the total cost to the consumer should be £120. If you sold your standard-rate product for £100, then your post-VAT income on that sale would be only £83.33. Remember to factor this in!

2: Missing VAT Return Deadlines

Don’t forget that your HMRC VAT Return is due quarterly (every 3 months) and must usually be paid to HMRC within one calendar month and 7 days from the end of your accounting period. HMRC provides a free VAT payment deadline calculator here to help you keep track of your tax billing dates.

Although every 3 months can feel like a tight turnaround, HMRC-recognised bridging software such as AbraTax can help automate this process, while saving time and effort for you and your business.


3: Forgetting to Keep a VAT Account

One of the easiest ways to keep track of your VAT obligations is to stay ahead of the curve: send the VAT portions of your sales into a separate account as soon as possible, ready to send off to HMRC later. This budgeting strategy can help you stay better attuned with your actual post-VAT revenue and aid in your cashflow planning.

4: Misunderstanding VAT Rates

The current VAT system has three rates, depending on the type and conditions of the products/services you offer. HMRC provides a comprehensive list with breakdowns of the various categories and rates. For now, here is a quick summary to get you on the right track:

Standard rate (20%) is the most common VAT applied to most items; reduced rate (5%) and zero rate (0%) apply only to certain specified goods and services, such as mobility aids, human food, and the health sector. Furthermore, some items are simply exempt from VAT. It's crucial to understand these distinctions and set your pricing accordingly.

5: Failing to Register for VAT

Don’t forget to register for VAT if your business is eligible: it is not an option! Typically, businesses turning over more than £85,000 in VAT-taxable revenue must register – but sometimes you must register even if turnover is below this threshold. Read the full list of criteria and conditions here, or have a look at our overview of VAT for UK businesses.

6: Forgetting to Reclaim VAT on Expenses

As a VAT-registered business, you are eligible to claim back the VAT paid on certain products and services pertaining to the running of your business or provision of your services. This can include reclaiming the VAT paid on travel expenses and business-related equipment. See our article How to Send a Successful VAT Return for more details and examples of this.

7: Forgetting to Pay “Clawback”

If you mistakenly reclaim VAT on goods or services which your business eventually does not pay for, remember that you must repay HMRC in a process called clawback. If you find yourself in this position, don’t worry! The process and conditions are outlined by HMRC here. In general, ensure you always have the appropriate documentation to support and track your VAT claims.

Bonus: Not Using AbraTax

Following the Making Tax Digital (MTD) initiative, it is now mandatory for most VAT-registered businesses to submit their VAT obligations online using compatible software. Although this has posed a huge shift in the fiscal process for many businesses, HMRC-recognised bridging services such as AbraTax can help make this a simple and comfortable process.

AbraTax is an effective, affordable, and long-term-compliant assistant to help you submit your VAT Returns online with ease. Our Excel-based software streamlines your computerised accounting and submits your Returns directly to HMRC. We even help you calculate some of the necessary figures!

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Managing your VAT obligations is a critical element of running a successful business – but, while challenges are part and parcel of VAT compliance, they don't have to be stumbling blocks. We hope that this article has helped you to stay clear of some of the common pitfalls. As you begin to optimise your approach to VAT, tools like AbraTax not only simplify the process but also allow you more peace of mind and free up valuable time.

If you found this article helpful, why not check out our other articles on VAT and running a business in the UK?

Disclaimer: We aim to offer educational articles on our blog, focusing on tax-related topics. However, it's important to note that over time, the relevancy of this content might diminish, and we cannot guarantee accuracy. While these articles serve as a tool for enhancing tax knowledge, they are not a replacement for expert advice in accounting, taxation, or legal matters, given the unique nature of each individual's situation. Should you require personalized assistance, we encourage contacting HM Revenue and Customs (HMRC).