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3 Small business VAT pitfalls to avoid

  • Blog
  • 28 January 2016

There are many challenges facing the small business owner and, of these, the rules surrounding Value Added Tax (VAT) are among the most exacting. The language of the relevant legislation and regulations can seem opaque and there are pitfalls which even the most diligent of firms can struggle to navigate. In this short guide, we set out three of the more common mistakes that we encounter at the FSB.

3 Small business VAT pitfalls to avoid

Calculating flat rate VAT incorrectly

The original architects of the flat rate VAT scheme intended for it to simplify matters and reduce the compliance burden for small businesses and, to a large extent, it accomplishes this objective. You will nonetheless still need to ensure that you accurately calculate your VAT bill to avoid penalties. This entails:

a) Establishing and using the correct percentage rate for your service or trade in order to calculate the rate of VAT that your company will be required to pay. This can be complicated if your enterprise provides two or more types of services and these would ordinarily be subject to different rates of VAT;

b) Taking care to exclude only those sales which are outside the scope of VAT from your flat rate turnover accounting. It is compulsory to include all of your organisation's other sales, including those which are exempt from VAT or zero-rated and:

c) Including the full sum of the VAT you charged your clients when you apply the percentage to your sales.

Using flat rate VAT without being formally accepted for the scheme by Her Majesty's Revenue and Customs (HMRC)

If you believe that your firm is eligible to use the flat rate scheme and you decide that it would be beneficial to do so, you are required by law to submit an application to HMRC for approval before you can use the scheme. Should you use the VAT flat rate scheme without the formal agreement of HMRC, you will be potentially liable to receive a penalty for incorrect payment of VAT. Details of the eligibility criteria and the application process are available from the HMRC website.

Reclaiming VAT on business entertainment

The general principle is that your company is not legally permitted to reclaim VAT on business entertainment, the latter being defined as any form of free or subsidised hospitality or entertainment provided to non-employees (including past or prospective employees). This is equally the case where an event's main purpose is client entertainment but some employees also happen to be present. If an event is principally intended for the benefit of employees but a number of non-employees attend (family members, for instance), you may be able to claim for the proportion of the event that was provided to employees.

The rules relating to VAT can be complex and we understand that professional tax protection advice is costly, while dealings with HMRC can be time-consuming. At the FSB, we provide expert assistance to small businesses with the management of their tax affairs. Our members have immediate access to our tax investigation services which comprise a range of benefits, including:

  • Free, wide-ranging advice from taxation professionals;
  • Tax investigation help if you are selected for audit by HMRC; and
  • Tax investigation insurance.

We are here to help small businesses to protect themselves and to grow.

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