If your business has a turnover of £90,000 or more and sells products or services subject to VAT, then you must register to pay it and file a return to HM Revenue & Customs (HMRC) – at least once every three months.
Your VAT return is a critical component of your financial obligations because it tells HMRC:
- How much VAT you have charged
- How much VAT you have paid
- How much VAT you must pay to HMRC
- Whether there are any discrepancies within your records
Without expert support and the right record-keeping tools, it’s easy to get VAT wrong because it requires you to provide detailed information to determine how much tax you owe.
Recognising and avoiding the most common causes of errors can save your business time, money, and potential legal complications.
Making Tax Digital
Errors in the payment and calculation of VAT are so widespread that the Government has taken steps to change the way that businesses keep and submit records.
Making Tax Digital (MTD) for VAT now requires all VAT-registered businesses to keep and submit VAT returns digitally using compatible software.
It was introduced to help businesses get VAT right by bringing in a standardised, digital system that simplifies the way VAT records are kept and submitted and aims to help businesses stay compliant with VAT requirements.
This is particularly important regarding the latest penalties for failing to abide by VAT regulations, which could see businesses fined up to 100 per cent of the VAT that they owe if a return contains careless or deliberate errors.
How do MTD requirements address real-world challenges?
MTD requirements bring several different techniques for submitting VAT accurately under one piece of legislation, helping to bring businesses in line with one another and with certain benchmarks.
In this way, it tackles some of the most common causes of errors within the VAT sphere.
Incorrect records
VAT returns require detailed documentation, including invoices, receipts, and proof of any adjustments or corrections, so failure to keep accurate and comprehensive records is commonplace and potentially serious for your business.
Implementing a suitable record-keeping system that captures all VAT-related transactions and employs automation can help you save time and access real-time data when creating your VAT return.
Digital records are now required under MTD, meaning their use it far more widespread and providers are well versed in supporting businesses using accountancy software for the first time.
Using the wrong rates
Different goods and services are taxed at different rates, and it’s crucial for businesses to apply the correct VAT rates.
For example, most goods and services are subject to the standard rate of 20 per cent. However, some goods such as children’s clothes or essential food items are zero-rated. Others, such as some residential renovations, are charged at a reduced rate of five per cent.
Applying the wrong VAT rate can lead to substantial discrepancies in your return.
MTD requires submission of your VAT return every three months, giving HMRC more of a real-time overview of your business. This means that any issues will be flagged sooner than submitting annually, allowing you to rectify any mistakes promptly.
Digital accountancy software also often provides additional resources to help you apply the correct rates to your VAT return.
Missed deadlines
VAT returns and payments have specific deadlines. Missing these deadlines is one of the most common issues faced by businesses, particularly those without in-house financial support or an external tax consultant.
This is because VAT returns take a significant amount of time and questions may arise at the last minute.
By mandating the use of digital records, MTD has provided more businesses with ready access to automation and resources which can help to reduce the time taken over each return.
Automated systems can also help manage these deadlines effectively through a calendar function or reminder setup.
Need additional support preparing your VAT returns? Contact us today and speak to a member of our team.