Common VAT pitfalls

Linda conducted an online webinar in June 2025 for businesses and landlords that are VAT-registered. We have summarised some of the key points discussed to help everyone that submits VAT returns.

VAT accounting schemes

Two main schemes: cash accounting and accrual accounting.
Cash accounting is suitable for businesses under £1.6 million turnover; once exceeded, accrual accounting becomes compulsory.
Retail businesses with immediate payment from customers might benefit more from accrual accounting.
Businesses should confirm their current scheme and ensure software settings align.

Bad debt relief and unpaid creditors

Under accrual accounting, bad debt relief can be claimed only after six months from the tax point if the customer has not paid.
Similarly, if a business has claimed VAT on a purchase but not paid the supplier within six months, it must reverse the VAT claim.

Claiming standard rate VAT on purchases that are zero-rated or exempt

Do not assume every expense includes VAT. This list is an example of how VAT applies to the different products. It is best to check the receipt to help guide whether you paid VAT or not. Here are some examples to illustrate how varied VAT on common purchases.

Audiobooks: 20%
E-books: 0%
Train and bus tickets: 0%
PPE: 0%
Hot takeaway food: 20%
Cold takeaway food: 0%
Business cards: 20%
Flyers/leaflets: 0% unless promotional (then 20%)
Utilities at commercial premises: 20%
Parking: depends on whether the provider has opted to tax
Uber: generally, no VAT is charged, so none can be reclaimed.

Reclaiming VAT on fuel and cars and mileage

Company cars with full benefit declarations allow full VAT recovery.
Mileage claims need VAT receipts and use of advisory fuel rates (not the full 45p per mile).
Many businesses avoid reclaiming due to complexity and record-keeping burden.

Reclaiming VAT on entertainment

VAT on business entertainment (e.g. clients, suppliers) is not recoverable.
VAT on employee entertainment is recoverable, provided the event is not exclusively for directors.
Trivial benefits under £50 (including VAT) can qualify for VAT recovery.

VAT and deposits

Receiving a deposit triggers a VAT tax point and must be included in the VAT return for that period.
Suppliers receiving a deposit should issue a VAT invoice, which the purchaser needs before reclaiming VAT.

Zero-rated export requirements

Exports are generally zero rated.
You must retain clear proof of export (e.g. courier documentation) in case of HMRC inspection.

Reclaiming VAT without invoices

Generally, you are not permitted to reclaim VAT without an invoice.
Exception: for purchases under £25 (e.g. tolls, some parking charges) from VAT-registered suppliers, VAT can be reclaimed without an invoice if proof of supplier’s VAT status is available.

Proformas

A proforma is a preliminary bill you have issued to your customer as a request for payment it is not a valid VAT invoice.
VAT should not be reclaimed until a proper tax invoice is received.
Avoid uploading proformas into your accounts to prevent double claiming.

Entering the wrong figures

Always review the detail of VAT reports before submitting.
Confirm VAT codes used match the nature of the transaction.
Calculate effective VAT rate on sales and purchases; large changes should prompt further review.
Maintain audit trails and supporting evidence for all claims.
Consistent review processes and good record-keeping can reduce penalties if errors are found during an HMRC inspection.

We hope this helps to explain VAT better and how to remain compliant. If you would like any further advice, please do contact us directly by calling 0115 928 32288 or by email info@coalesco.co.uk