VAT can be one of the trickiest areas of compliance for UK small business owners.
Between complex rules, ever-changing thresholds, and strict HMRC deadlines, it’s easy to slip up.
Unfortunately, even minor VAT mistakes can lead to costly penalties or cash flow issues.
In this guide, we’ll walk through the most common VAT mistakes we see among small and micro businesses, and how you can avoid them.
Missing the VAT Registration Threshold
One of the most frequent issues is failing to register for VAT on time.
As of 2025, you must register if your VAT-taxable turnover exceeds £90,000 in any rolling 12-month period, or if you expect to exceed that in the next 30 days alone.
Many businesses mistakenly check this by calendar year, but HMRC uses a rolling total, meaning you need to check your turnover every month.
How to avoid it:
- Monitor turnover monthly
- Set up an alert or use bookkeeping software that flags when you’re close
- Register within 30 days to avoid penalties
Charging the Wrong VAT Rate
Different goods and services attract different VAT rates:
- 20% standard rate (most goods and services)
- 5% reduced rate (e.g. energy-saving materials)
- 0% (e.g. children’s clothing, some foods)
- Exempt (e.g. financial services, education)
Charging VAT incorrectly, or when you shouldn’t, can result in overcharging customers or underpaying HMRC.
How to avoid it:
- Check HMRC’s VAT rates list for your products or services
- Keep up to date with rate changes
- Use accounting software with category-level VAT settings
Not Issuing Correct VAT Invoices
Once registered, you must issue VAT-compliant invoices for all taxable sales.
These must include specific details like your VAT number, the VAT amount, and a clear breakdown of the goods or services sold.
How to avoid it:
- Use invoicing software that complies with VAT rules
- Include your business name, VAT number, invoice date, and total VAT charged
- Review sample VAT invoices on HMRC’s website
At Legacy Figures Accountancy, we can work with you to look after your finances and manage you VAT for you. Want to learn more? Let’s have a chat.
Failing to Keep Digital Records (MTD for VAT)
Making Tax Digital (MTD) for VAT requires most VAT-registered businesses to:
- Keep digital records of sales and purchases
- Submit VAT returns using MTD-compatible software
Manually keeping spreadsheets or paper records no longer meets HMRC requirements.
How to avoid it:
- Use MTD-compatible software like QuickBooks, Xero, or FreeAgent
- Keep your records up to date weekly or monthly
- Don’t wait until the VAT deadline to sort your books
Reclaiming VAT Incorrectly
Reclaiming VAT on items that are not eligible (or not wholly for business use) is a common and risky error. Examples include:
- Personal expenses
- Business entertaining
- Company cars used privately
How to avoid it:
- Know which expenses qualify for VAT recovery
- Keep clear receipts with VAT breakdowns
- Separate personal and business transactions
Missing VAT Return Deadlines
HMRC expects most businesses to file VAT returns quarterly.
Miss a deadline and you may face default surcharges and penalties.
How to avoid it:
- Set calendar reminders for VAT deadlines
- File returns and make payments early
- Work with a bookkeeper who can handle returns on your behalf
Using the Wrong VAT Scheme
Choosing a VAT scheme that doesn’t suit your business model can cost you.
For example, using the Standard Scheme when you have low expenses, or joining the Flat Rate Scheme when you’re a limited cost trader subject to the 16.5% rate.
How to avoid it:
- Review your VAT scheme annually or if your business changes
- Get advice before switching or registering
- Understand the pros and cons of each scheme
Final Thoughts: What’s Best for You and Your Business?
VAT doesn’t have to be a source of stress, but it does require attention to detail.
By staying informed, using the right tools, and knowing the common traps, you can keep your business compliant and avoid unnecessary costs.
If you’re unsure about your VAT obligations or think you might have made a mistake, don’t worry, we can help.
If you have any questions or need some guidance, get in touch today for a friendly, no-obligation chat.
