Many business owners spend time worrying about their VAT returns, with a key concern being a fear of making errors, leading to possible penalties.
Below we outline 5 common VAT errors and their solutions, to help you feel more confident when submitting your VAT returns.
#1 – Reclaiming VAT without invoices
To reclaim VAT on any business expense, you must provide evidence in the form of a VAT invoice. The general rule of thumb is no evidence = no claim. The best way to avoid this issue and to maximise your VAT claim is to upload invoices into Xero, either directly or by using Dext Prepare.
#2 – Claiming VAT on the purchase of a car
As a general rule you cannot claim VAT on the purchase of a car.
There is a technical exception where VAT can be claimed if the car is to be used solely for the business, with no private use at all AND it is not available for private use. However, HMRC apply these rules very strictly and would require hard evidence that the car meets these rules. In practice it would be very difficult to provide evidence that a car is not available for private use at all.
#3 – Claiming VAT on the full cost of a car lease
Input VAT is restricted at 50% for car lease payments. Please see our FAQ on the best way to set up recurring car lease costs in Xero.
#4 – Recovering VAT on UK business entertainment
No VAT is recoverable on business entertainment expenses. Use the exempt VAT code for all business entertainment expenses.
#5 – Not accounting for VAT on deposits
Any payment received from a customer creates a tax point for VAT purposes. In order to account for VAT at the correct time, always raise an invoice for the deposit in Xero. This will also avoid a potential overpayment of VAT when the final invoice is raised, as the final invoice will be for the remaining balance, rather than the full sum.
Read our full guide on accounting for value added tax (VAT) to learn more.
If you need help with this, or with other advice, then please get in touch with our accounting team.