The importance of accurate VAT compliance for your business

For VAT-registered businesses, remaining compliant with VAT regulations is essential to avoiding penalties and maintaining smooth business operations. Keeping your business VAT compliant means you can meet your legal obligations to the HMRC, avoid penalties and fines, and can even assist in managing your overall cash flow for better long-term financial stability.

VAT explained

Value Added Tax (VAT) is tax applied to the majority of goods and services sold in the UK. For businesses that exceed an annual turnover of £90,000, it is a legal requirement to register for VAT and charge it on their taxable goods and services, although businesses earning below this threshold can also register for VAT if they choose. 

By registering for VAT your business can reclaim VAT on purchases, which can assist in improving your overall cash flow and enhance your business credibility.

VAT is collected by businesses on behalf of the HMRC, meaning that if your business is VAT registered, it is your responsibility to calculate, report, and pay the correct amount of tax owed.

Learn more about VAT basics in our blog.

What is a VAT return?

VAT returns are a financial report your business submits to HMRC that summarises the amount of VAT you have charged in sales and the amount of VAT you have paid on purchases. The difference between these two figures determines whether you owe money to HMRC or whether you are eligible to reclaim it. 

Submitting accurate and timely VAT returns is crucial to remaining tax compliant, and it is the responsibility of your business to ensure that VAT calculations are correct and all relevant documentation is stored and accessible to support the figures you report.

VAT compliance explained

In order to remain VAT compliant, your business must adhere to all rules and regulations detailed by HMRC regarding VAT registration, record keeping, VAT returns, and payments. Being VAT compliant means ensuring that all aspects of your VAT related activities are correct and submitted on time. 

This includes properly recording transactions, applying the correct VAT rates, and submitting accurate VAT returns. Failure to comply with these regulations can result in penalties, fines, interest charges, and can be potentially harmful to the future of your business.

VAT compliance obligations for small businesses

As a small business you will have specific VAT compliance obligations that must be met to avoid penalties, including:

• Registering for VAT when your annual turnover exceeds £90,000

• Issuing VAT invoices that include all required details, such as VAT number, date, and breakdown of the VAT charged.

• Maintaining detailed records of all VAT transactions, including sales, purchases, and VAT collected and paid.

• Submitting VAT returns on time, usually on a quarterly basis, and making sure that they are accurate and complete.

• Keeping up-to-date with changes in VAT rates and rules that may affect your business.

How to correct errors in your VAT return

Preparing VAT returns can be a complicated process, and as such mistakes are likely to happen at some point. In this case it is important to correct any errors in your VAT return as soon as possible to stay tax compliant, using HMRC’s guidelines on how to correct errors in your VAT return.

What is the VAT correction reporting threshold?

If you have made an error on a VAT return, the first step is to determine whether the error is above or below the reporting threshold, which is currently set at £10,000 at the time of writing*, or £50,000 if it is below 1% of your business’ annual turnover. 

Errors above this threshold must be reported to HMRC directly.

Which errors are reportable?

Reportable errors include significant inaccuracies that affect the VAT due to HMRC. This could include under-reporting VAT due on sales or over-claiming VAT on purchases. 

Minor errors below the reporting threshold can also be rectified on your next VAT return in certain circumstances, but when possible it is important to correct VAT errors as soon as you become aware of them.

How to report an error that falls out of the adjustment criteria?

If a VAT error exceeds the adjustment criteria it must be reported to HMRC using form VAT652, or by writing to the VAT Error Correction Team. It is important to include all details of the error, how it occurred, and the amount of VAT that needs to be adjusted. 

As stated above, errors are quite common due to the complexities of VAT reporting, and HMRC will generally be understanding of these errors provided you are honest about reporting them and making the necessary adjustments.

If you discover an error in your reports it is vital that you contact HMRC at the earliest possible time to make the proper corrections, or learn more about how to correct a VAT error.

Will I have to pay a dishonest conduct penalty?

Dishonest conduct penalties for VAT errors depend on the severity and nature of the mistake. HMRC generally considers whether the error was ‘careless’, deliberate, due to reasonable care, or if you have a ‘reasonable excuse’.

Upon consideration may enforce penalties ranging from 0% to 100% of the underpaid VAT, with reductions available for voluntary disclosure and cooperation with HMRC.

This type of penalty is separate to the interest and penalties associated with late filing and late payment. 

What is considered a reasonable excuse for a VAT error?

There are a number of reasons that HMRC may consider VAT errors to have a ‘reasonable excuse’, but you will usually need to provide evidence to support your claim if one of these is the reason for an error. This includes:

• You or your family have suffered a bereavement before the return deadline. It is up to HMRC’s discretion how long before the return deadline is acceptable. 

• You fell ill shortly before the return deadline.

• You were subject to software errors or malfunctions beyond your control, for instance, due to a server error from third-party software.

• Your business suffered theft, floods, or fires.

• If the HMRC itself was experiencing technical difficulties that made it impossible to submit a VAT return.

You can make an appeal to HMRC if you are subjected to a fine when you have a reasonable excuse.

Human errors in VAT returns

HMRC understands that the VAT return process can be complex, and for many people this may result in genuine human errors when submitting their VAT returns. If you notice an error after submitting your VAT return you can notify HMRC and, if necessary, appeal any fines applied to you if the mistake was down to human error. 

Be aware that HMRC will investigate this matter to determine whether the error was genuine or deliberate. If you have voluntarily disclosed an error to HMRC they may decide to waive your penalty fee, or apply a penalty between 0% - 30% of lost revenue. It is important to be cooperative and transparent with HMRC so they may understand the nature of your mistake.

Making Tax Digital for VAT explained

Making Tax Digital (MTD) is an HMRC initiative aimed at simplifying tax reporting through digital record-keeping and online submissions. Under MTD, VAT-registered businesses must keep digital records and use compatible software to submit their VAT returns.

Making Tax Digital (MTD) for VAT

As of April 2022, all VAT-registered businesses must comply with MTD rules for VAT, requiring digital record-keeping and submission of VAT returns through MTD-compliant software.

Setting up an online VAT account

Register with HMRC via the Government Gateway to start submitting VAT returns digitally.

Benefits of using MTD-compliant software

QuickBooks helps you manage your VAT transactions, helps you prepare your VAT returns, and can be used to keep all your VAT records in one place.

Error management

HMRC expects businesses to take reasonable care in their VAT submissions. Mistakes should be corrected promptly to avoid penalties.

Cloud accounting

Utilising cloud-based accounting solutions like QuickBooks can reduce errors and streamline your VAT process. Using MTD-compatible software for VAT became mandatory in April 2022.

MTD for VAT is mandatory for all VAT-registered businesses, and non-compliance can result in penalties. Using MTD-compliant software like QuickBooks can streamline the process, reduce errors, and help you remain compliant.

For more information, explore our comprehensive guidance on Making Tax Digital.

Stay MTD and VAT compliant with QuickBooks 

QuickBooks offers a comprehensive solution for managing your VAT obligations. With features designed to simplify VAT record-keeping, automate VAT calculations, and ensure timely submissions, QuickBooks helps businesses stay compliant with both VAT regulations and Making Tax Digital requirements. 

The software is HMRC-recognised for MTD for VAT and provides peace of mind by reducing the risk of errors and ensuring that your VAT returns are accurate and on time.

Explore our plans and pricing page for a breakdown of our services, or try QuickBooks free for 3 months and discover how our software can enhance your accounting and VAT return capabilities. QuickBooks is also able to help your business become compliant with Making Tax Digital.

The information on this website is provided free of charge and is intended to be helpful to a wide range of businesses. Because of its general nature the information cannot be taken as comprehensive and they do not constitute and should never be used as a substitute for legal, accounting, tax or professional advice. We cannot guarantee that the information applies to the individual circumstances of your business. Despite our best efforts it is possible that some information may be out of date. Any reliance you place on information found on this site or linked to on other websites will be at your own risk.