Common VAT Traps

Here are some VAT traps to be aware of:

Avoiding VAT registration by business splitting
There are rules to prevent people avoiding VAT registration by splitting sales between different people.

It’s important to keep in mind that a “business” is not registered for VAT -a person is. The person can be an individual, partnership or company. The classic example is a pub where the pub with accommodation – the husband’s name and the accommodation is in the wife’s name.

If you have more than one business that you treat separately fro VAT be careful.

Not applying to use VAT flat rate scheme
Unlike other VAT schemes like Cash Accounting, you need to get the permission of the tax office to use the Flat VAT Rate Scheme.

It’s important you get their agreement to use the scheme because applications cannot be back-dated. This could cost you thousands of pounds.

Reclaiming VAT on parking meters
You need a valid VAT invoice to reclaim VAT and on-street parking meters are not subject to VAT so there will not be a VAT number on the receipt.

This maybe a very small thing but if the tax office spots this it could encourage them to look closer at your business and assume there are other errors, like not declaring all your income.

Note – all parking tickets should be checked carefully as council parking generally does not have VAT.

Claiming VAT on business entertaining
VAT is not recoverable on any entertaining – that includes lunches with clients unless they are overseas customers.

However, you can claim the VAT on your annual party if it is below £150 per head. And, you can have two parties at £75 a head.

Failing to repay VAT on unpaid invoices
If a business has not paid a supplier bill for over six months (and they originally reclaimed the VAT under the accruals basis) they need to repay the VAT to the tax office.