VAT has a way of looking simple until it’s not. You charge VAT on sales, reclaim VAT on purchases, submit a return, and pay HMRC the difference. In principle, that is straightforward. In practice, VAT is one of the areas where small mistakes can snowball quickly.
The problem is not usually one dramatic error. It is the missed registration point, the receipt that is not a VAT invoice, the return filed a few days late, or the cash that was spent before the VAT bill arrived. Each one feels manageable on its own. Put them together and they can result in penalties, interest payments, cash flow pressure and a lot of unnecessary stress.
Here are six VAT mistakes we see small businesses in Salisbury and across Wiltshire run into, plus what to do instead.
1. Waiting Too Long to Register
The VAT registration threshold is currently £90,000 of taxable turnover in a rolling 12-month period. That rolling part matters. It is not based only on your financial year, your tax year, or the number in your head from last April. You need to keep checking the last 12 months as you go on a rolling basis. You also need to look forward 30 days and if you know you’ll exceed the registration threshold you may need to register for VAT immediately.
This catches growing businesses because the threshold often arrives quietly. A good quarter lands, a couple of bigger invoices go out, and suddenly the business has gone over the line without anyone noticing. Once that happens, you may need to register from a date that has already passed, which means going back over sales and working out the VAT position after the fact.
The fix is simple: review taxable turnover every month once you are anywhere near £75,000 to £80,000. If you are growing quickly, review it more often. It is much easier to plan VAT registration before you cross the threshold than to tidy it up afterwards.
2. Treating VAT Money as Spendable Cash
VAT collected from customers is not really yours. It lands in your bank account, which makes it feel like working capital, but part of that money belongs to HMRC.
This is where VAT becomes a cash flow problem. A business has a strong sales month, spends the cash on stock, wages or equipment, and only later realises the VAT return is due. The profit might be looking good. The bank balance is not.
The habit that helps here is to move a portion of the VAT into a separate savings account as money comes in. It does not have to be perfect to be useful. Even moving a sensible estimate weekly gives you a clearer picture of what is actually available to spend.
If cash flow is already tight, have a look at our guide to cash flow habits for small businesses. VAT planning and cash flow planning are closely linked.
3. Filing Late, Even When There Is Nothing to Pay
A nil VAT return still has to be filed, and on time.
HMRC now uses a points-based penalty system for late VAT submissions. If you submit late, you get a penalty point. Once you reach the threshold for your accounting period, HMRC charges a £200 penalty, with further £200 penalties for later missed submissions while you remain at the threshold.
Late payment is separate. If VAT is paid late, interest can run from the first day the payment is overdue. Late payment penalties can also apply if the payment is more than 15 days overdue, with further consequences after 31 days.
The practical answer is boring but effective: set reminders for the return deadline, the payment deadline, and one internal deadline a week earlier. If you use accounting software, do not rely on the software reminder alone. Put the dates somewhere you actually look.
4. Reclaiming VAT Without a Proper VAT Invoice
Not every receipt gives you the right to reclaim VAT. HMRC expects you to have proper evidence for input VAT claims. In many cases, that means a valid VAT invoice showing the supplier’s VAT details, the VAT charged, and the information needed to support the claim.
This often goes wrong with online purchases, fuel, subsistence, software, and small supplier invoices. The transaction is real, the cost is real, but the paperwork is not enough to support the VAT claim.
A good rule is: before reclaiming VAT, ask whether you could defend the claim if HMRC asked for the invoice. If the answer is “probably not”, tidy the evidence before the return is submitted.
It is also worth keeping VAT records properly. VAT records generally need to be kept for at least six years, and digital records matter because Making Tax Digital applies to VAT-registered businesses.
5. Using the Wrong VAT Rate
Most goods and services use the standard VAT rate, currently 20%, but not everything does. Some supplies are zero-rated, some are reduced-rated, and some are exempt. The difference matters.
This can be particularly awkward for businesses that sell a mix of products or services. It can also affect construction, food, training, land and property, charities, exports, and certain cross-border services. If you apply the wrong rate, you might underpay VAT, overcharge customers, or reclaim VAT you were not entitled to reclaim.
If your business sells anything outside a simple standard-rated service, do not guess. Get the VAT treatment checked and document the decision. That way, if the question comes up again, you are not starting from scratch.
6. Not Reviewing the VAT Scheme You Are On
The VAT scheme that made sense when you registered may not be the best fit now. Cash Accounting, Flat Rate, Annual Accounting and standard VAT accounting all have different effects on timing, admin and cash flow.
For example, Cash Accounting can help some businesses because VAT is paid when customers pay, not when invoices are raised. That can be useful if customers are slow to pay. But it is not right for everyone. The Flat Rate Scheme can simplify admin for some businesses, but it can also cost more depending on your costs and sector.
This is worth reviewing at least once a year, and sooner if your business model changes. New services, new customers, bigger purchases, slower payment terms, or a shift from local to national work can all change the answer.
A Simple VAT Health Check
If VAT has started to feel messy, start with these five questions:
- Are you tracking rolling 12-month taxable turnover?
- Do you know exactly when your next VAT return and payment are due?
- Is VAT money separated from spendable cash?
- Do you have proper VAT invoices for the VAT you reclaim?
- Is your current VAT scheme still the right one?
If any of those answers are unclear, it is worth getting help before the next return is due.
Getting Help With VAT Returns in Salisbury
VAT is not just a compliance job. Done properly, it protects cash flow, keeps records clean and gives you fewer surprises. Done badly, it becomes one more thing sitting in the back of your mind.
Caboodle Business Support works with small businesses across Salisbury and Wiltshire on VAT returns, bookkeeping and the wider accountancy support that sits around them. Our enthusiastic team communicates in plain English, and keeps things practical and joined up, so you understand what is happening rather than just being told a number to pay.
If you would like someone to look over your VAT setup, your next return, or the scheme you are using, see how we work with our clients or get in touch for a no-pressure conversation.