How can SMEs avoid the most common VAT pitfalls?

The UK implementation of VAT is often seen as being needlessly complex, likely as a result of the lack of significant reforms in years.

However, this often puts SMEs at risk of being unfairly caught out when the complexity of the rules is overlooked.

Given that SMEs are already struggling to keep up with operational costs, we want to ensure that VAT penalties are not added to the pile of bills that need to be managed.

Should I register for VAT voluntarily?

One of the biggest pitfalls centres around when businesses should register or deregister for VAT.

It is voluntary to register for VAT at any point when trading, regardless of annual turnover.

However, if taxable turnover exceeds £90,000 during any 12-month period, then it is necessary to register for VAT.

If your business flourishes and you find yourself crossing the threshold unnoticed, then you will have 30 days from the end of the month in which the threshold was crossed to register for VAT.

Ideally, you will register for VAT 30 days before the threshold is due to be crossed.

This enables you to stay compliant and begin completing your filings on time to avoid penalties for missed deadlines.

Businesses that have a taxable turnover below £88,000 are able to deregister for VAT and relinquish the responsibility of having to keep up with the reporting obligations associated with it.

However, some businesses may benefit from being VAT registered.

If your business is primarily focused on Business-to-Business (B2B) work rather than Business-to-Consumer (B2C) transactions, then being VAT registered may be advantageous.

Many B2B transactions can be reclaimed through VAT, whereas B2C transactions generally cannot be.

This is because VAT sits alongside the sales price in B2B transactions, while it is folded into the price for B2C transactions.

What happens if I get my VAT return wrong?

Deciding whether to register or deregister for VAT is only part of the puzzle.

If you are VAT registered, you need to ensure that you are keeping pace with all of the submissions required by HMRC.

You will be punished for missing a deadline or submitting an inaccurate return, though the exact penalty is determined by the level of malice involved in the misdeed.

If it is entirely accidental, HMRC are more lenient than if you attempt to deliberately hide your actions or if you attempt to commit tax fraud.

For careless errors, you will likely be charged up to 30 per cent of the potential lost revenue on top of the correct amount that should have been paid.

This rises to 70 per cent if there was a deliberate error that was not maliciously hidden.

If you are caught trying to hide a deliberate error, then the penalty increases to 100 per cent of the lost revenue.

HMRC will begin examining your return in more detail if the activity does not align with what would be expected of a business akin to yours.

Discrepancies like this might not mean that you have made a mistake or are committing fraud, but you should know that they will be a red flag for HMRC.

How can I stay VAT compliant?

The best way to keep on top of your VAT obligations is to seek professional support.

This will ensure that you can confidently approach your VAT filings knowing that your information is in order and that you are unlikely to receive a penalty.

We can also support you in meeting the deadlines, as well as offer advice on when registering or deregistering is right for your business.