10 common VAT mistakes

1. Reclaiming VAT on on-street meter parking. Businesses should only reclaim VAT if they are in possession of a valid tax invoice or a receipt showing a VAT registration number. On-street parking meter charges are not subject to VAT so no VAT receipt will be issued. Therefore no VAT can be reclaimed.
2. Recovering VAT on UK business entertainment. No VAT is recoverable on business entertainment expenses.
3. Failing to meet the export zero-rating VAT requirements. In England, Scotland and Wales, the goods must be sold to a non-UK customer and the business must have proper commercial evidence that the goods were physically exported to a non-UK country. In Northern Ireland, the business must have proper commercial evidence that the goods were physically exported to a non-EU country.
4. Incorrectly reclaiming VAT twice on a purchase (normally occurs if a payment request is later followed by VAT invoice after payment is made). A payment request is not a valid tax invoice and it should state that it cannot be used to reclaim VAT. In order to recover VAT charged on goods and services the business must have a proper tax invoice or tax receipt.
5. Charging the wrong VAT rate on sales. Businesses should charge VAT at the standard rate of VAT unless it is clear that the transaction is either liable to VAT at the reduced rate or is zero-rated. If the business is selling goods/services to overseas customers, the transaction may not be liable to VAT providing certain conditions are satisfied.
6. Misunderstanding the correct VAT treatment of a land and property transaction. This is a very complex area of VAT and most land and property transactions are exempt from VAT. However, if a new commercial property or civil engineering works is disposed of or the business has opted to tax then the supply may be liable to VAT at the standard rate.
7. Claiming VAT on mileage but failing to keep a VAT receipt. Since January 2006 every business is required to keep a VAT receipt for fuel purchased in order to reclaim VAT on business mileage.
8. Failing to repay VAT recovered on purchases when supplier has not been paid for over 6 months. If a business has not paid a supplier invoice for over 6 months, they are required to repay any VAT recovered to HMRC.
9. Incorrectly recovering import VAT shown on the import agent's invoice. Businesses can only recover import VAT on an official document, called a 'Monthly Import VAT Certificate' or 'C79', which is usually issued by HMRC. VAT cannot be claimed on the invoice issued by the import agent or freight forwarder as the invoice shows a breakdown of the charges paid on behalf of the importer. It is not a VAT invoice. It is also worth noting that postponed VAT accounting will now be used to account for VAT incurred on most imports made by UK VAT registered businesses.
10. Misunderstanding the VAT treatment of 'management charges'. If the business is in a VAT group with other companies, then any charges issued between members of the VAT group are disregarded for VAT purposes. If the management charge is issued to an overseas company, the business will need to determine whether the services supplied to the overseas associate are liable to UK VAT or whether the overseas associate needs to account for any VAT due under the reverse charge mechanism.

Reviewed and updated: 13 Dec 2021.

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