Common VAT Mistakes (And How to Avoid Them)

VAT is one of those things that often feels straightforward… right up until it suddenly isn’t. Many people register for VAT thinking it’s just a case of adding 20% to invoices and sending HMRC a return every few months. In reality, VAT has a habit of catching people out especially when you’re new to it or juggling everything else that comes with running a business.

The good news? Most VAT mistakes are very common, very fixable, and very avoidable once you know what to look out for. So let’s walk through some of the most frequent ones.

Common VAT Mistakes

1. Registering for VAT too late

This is probably the most common mistake of all. You must register for VAT if your taxable turnover goes over the VAT threshold (currently £90,000). This must be worked out in any rolling 12-month period not per tax year.

Example: Alex’s business steadily grows and quietly passes the VAT threshold in August. He doesn’t notice until December and registers then. HMRC will still expect VAT to have been charged from the date he should have registered even if he didn’t charge it to customers.

This can lead to a VAT bill that comes straight out of your own pocket. HMRC is sympathetic to many things, but “I didn’t realise” isn’t usually one of them.

2. Charging VAT incorrectly

Once you’re VAT registered, not everything you sell is automatically standard-rated.

Some supplies are:

• Standard-rated (20%)

• Reduced-rated (5%)

• Zero-rated (0%)

• Exempt

Mixing these up can lead to undercharging or overcharging VAT both of which cause problems.

Example: Sam provides a mix of services, some standard-rated and some exempt. He charges VAT on everything “to be safe”. Unfortunately, that means charging VAT where he shouldn’t.

3. Claiming VAT you’re not allowed to reclaim

Not all VAT on expenses is reclaimable, even if it feels business-related.

Common problem areas include:

• Client entertaining

• Personal expenses

• Some types of food and drink

• Mileage vs fuel

• Home-working costs done incorrectly

  
  

Example: Lucy takes a client out for lunch and reclaims the VAT because “it was for work”. HMRC disagrees. Client entertainment VAT is blocked no matter how business-y the conversation was.

4. Missing VAT return deadlines

VAT returns are usually due one month and seven days after the end of the VAT period. Miss the deadline and penalties or interest can apply.

Example: Ben knows his VAT return is due, but assumes he has a bit of wiggle room. He files a few days late. HMRC applies interest automatically there’s no grace period, and no reminder letter first.

5. Using the wrong VAT scheme (or not understanding the one you’re on)

Standard VAT accounting isn’t the only option. There are schemes like:

• Flat Rate Scheme

• Cash Accounting Scheme

• Annual Accounting

• Margin schemes

They can be helpful but only if they suit your business and you understand how they work.

Example: Maya joins the Flat Rate Scheme thinking it will simplify things. She continues reclaiming VAT on expenses as normal which you generally can’t do under Flat Rate (with limited exceptions). The scheme itself isn’t the problem but misunderstanding it is.

6. Mixing personal and business VAT

VAT registration doesn’t magically turn personal spending into business expenses.

Claiming VAT on personal purchases, even accidentally, can cause issues during checks.

Example: Chris pays for groceries on the business card “just this once” and reclaims the VAT. It’s small, but it’s still incorrect and patterns like this are exactly what HMRC looks for.

7. Poor VAT record-keeping

VAT relies heavily on good records. Missing invoices, unclear descriptions, or “best guesses” make returns risky.

Example: Emma reclaims VAT on an expense but can’t find the VAT receipt when asked for it. Without evidence, HMRC can disallow the claim even if the purchase itself was genuine. VAT works on proof, not memory.

8. Not understanding zero-rated vs exempt

This one is subtle and catches a lot of people out.

• Zero-rated supplies are taxable, but at 0% VAT

• Exempt supplies are not taxable at all

Why does this matter? It affects whether you can reclaim VAT on related costs.

Example: Tom assumes zero-rated and exempt mean the same thing. They don’t. This misunderstanding leads to reclaiming VAT he isn’t entitled to and HMRC asking questions later.

9. Forgetting about VAT when pricing

VAT can quietly erode profit if it’s not factored into pricing properly.

Example: Nina registers for VAT but keeps her prices the same to stay competitive. She forgets that 20% of that income now belongs to HMRC. Her profit drops overnight not because the business is failing, but because pricing wasn’t adjusted. VAT doesn’t reduce your income. It reduces what you keep.

What happens if VAT mistakes aren’t fixed?

Most VAT errors aren’t deliberate and HMRC knows that. But mistakes can still lead to:

• VAT bills you weren’t expecting

• Interest charges

• Penalties in some cases

• Stress you could really do without

The sooner issues are spotted and corrected, the easier they are to deal with.

Final thoughts

VAT doesn’t have to be frightening but it does need care and understanding. Most VAT mistakes come from:

• Assumptions

• Rushing

• Not quite knowing how a rule works

• Or thinking “that’ll probably be fine”

  
  

A little knowledge goes a long way. If you’re new to VAT, registering soon, or just want to be confident you’re doing things correctly, understanding these common pitfalls is a great place to start.

With VAT, it’s rarely the big, dramatic errors that cause trouble, it’s the small, everyday ones that quietly add up. Knowing what to look out for... That’s half the battle.