VAT Taxes – Avoid Common VAT Tax Mistakes When Selling in the UK
Whether it’s your eCommerce store or you’re selling through Amazon, you’re going to need to educate yourself on VAT Taxes in order to avoid the most common VAT tax mistakes.
Are you selling in the UK or European markets, through Amazon or via any other channel?
Then you’ll need to know about VAT taxes, because it’s a common source of confusion for sellers based in the US wanting to sell in the EU.
What is VAT?
VAT is charged at the moment of a sale/transaction, and the business or person who is VAT registered is responsible for filling out regular VAT returns (usually quarterly) to forward the VAT amount they have collected from customers to the HMRC.
When you are VAT registered, you can claim back the VAT that you pay on your business expenses.
At first glance, simply pushing your products overseas might seam like a simple way to grow your online business, but it won’t be long before you start asking questions like;
- Do I need a company registration?
- What are VAT taxes?
- How do I deal with currency exchange?
- How do I handle Amazon’s FBA?
- What about duties and customs?
- Should I even try this on my own?
To any business, this can be daunting, but to a small business it can be a total deal breaker.
If you’re an Amazon Seller, then you will want to check out Amazon’s VAT Knowledge Center.
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Discover The Most Common VAT Mistakes
You’re probably starting to get an idea of how VAT can be complex and consequently how people make mistakes when calculating it.
Here are some of the most common VAT tax mistakes people make and ones that account for a large number of the problems – take note and avoid.
1. Putting In The Wrong Figures
You will find that there are eight boxes that you will need to complete on your VAT return but it is box 6 that commonly has user error because the correct figure will depend on whether or not you’re using a flat rate.
This is the box that HMRC most commonly finds mistakes with on the VAT return.
You want to double check box 6 if you’re using a Flat Rate VAT scheme to make sure you’ve applied the correct percentage. You’ll use the net income if you’re applying the Cash Accounting scheme.
You will now want to check box one again.
If the flat rate percentage is 14.5%, as an example, and your inclusive income for the period is £48,000, then that will be the figure that is in box 6 and box 1 will be 14.5% of that which is £6,960.
If, on the other hand, you’re using the cash scheme then box 6 will contain your net income of VAT.
In this case, if box 6 is £40,000 then the amount in box 1 would be £8,000. Keep in mind that there could be other figures that you would need to account for and they could have an effect on these numbers and so you’ll want to make sure to check those.
2. Applying the Wrong Flat Rate Percentage
This is another area that gets the attention of the HMRC which often causes VAT inquiries.
With the new rule known as Limited Cost Trader, it is highly likely that many small businesses will be found to have mistakes. With the introduction of this new rule, the flat rate percentage is increased for most of those businesses.
Because of this, it will be necessary to make sure that your flat rate percentage is correct or it will trigger an inquiry and lead to you having to payback VAT for those mistakes.
3. Failure to Compare VAT Schemes
It will appear that the flat rate scheme ads cash flow savings for small businesses and makes the accounting simpler. Even so, it is a mistake to not compare it to other VAT schemes.
As an example, if a business has a significant expense that it pays VAT on, they might find it to be tax-efficient to join the flat rate scheme. On the other hand, when a business has some exempt income they will have to be careful because choosing to go with the flat rate scheme could cause the business to pay more when it would otherwise be exempt.
4. Flat Rate Turnover
When an income is considered exempt from VAT it is simply that. Because it’s exempt you wouldn’t want to include it on your return. But there is one concern with the flat rate scheme.
The total gross income that you put in box 6 on the VAT return has to include the entire value which includes the exempt supplies and other factors.
This can then lead to some small businesses paying more using the flat rate scheme.
5. The 1% Reduction Is Applied After Its Expiration Date
Upon first joining the flat rate scheme you’ll be given a 1% reduction on the industry percentage. It’s important to understand that it expires on the one-year anniversary of your VAT registration rather than when you joined the scheme.
Some bookkeeping software commonly gets this mixed up.
VAT will catch this as a mistake if you have it as such. This will end up causing you to have to pay for any mistakes.
6. Failure To Supply Sufficient Evidence That Supports VAT Reclaims
If you don’t have a receipt, you don’t have a claim.
That is the general rule when claiming back VAT. If you do have a receipt, it will be important to make sure it’s something that does carry VAT. It’s just not something that you would want to take a risk with.
One of the good ways to help prevent you from losing money is to familiarize yourself with one of the easy-to-use apps that allows you to take a quick copy of your receipt. You will then be able to automatically store it in the bookkeeping system you’re using.
7. Non-Business Use Expense Claims
You may have some expenses that are used in part for business and in part for personal use. Unfortunately, there are business owners that make the mistake of trying to claim the entire amount even though some of it is being used personally. Doing this will ultimately lead to added expenses.
8. Claiming Motor Vehicle and Fuel Cost
Often the vehicle will not be strictly for business use and therefore is used privately.
VAT only allows you to make a claim on a vehicle that is used strictly for business purposes and isn’t available when it’s used privately.
Here is a good list of what you can reclaim from VAT IT.
9. Claims on Entertainment Costs
In most cases, these type of expenses are blocked.
It is understood that there are some sectors of business where entertaining clients is normal and necessary to win contracts but those expenses will usually not be claimable. This is on the list of things to check by the HMRC. When you’re reviewing your return, make sure to check to see that you didn’t inappropriately make this type of claim. Also, make sure that the software that you’re using didn’t somehow mistake those expenses and put them on your return inappropriately.
10. Failing to Claim Staff Entertainment
Even though entertainment is something that usually cannot be claimed, this is one exception to that rule.
A common mistake by small businesses is to fail to claim this expense because they simply thought that all entertainment couldn’t be included. Whenever you entertain staff such as the director of your own company, then you will want to claim it as one of your expenses. Even so, this also needs to be verified to make sure the entertainment you’re claiming is one allowed by VAT.