9 VAT mistakes small businesses make (and how to fix them)

VAT is one of those areas where small errors quietly build up over several quarters before anyone notices. And when HMRC does notice, they can go back up to four years in most cases, longer if they suspect deliberate errors. The good news is that most VAT mistakes are fixable, and catching them yourself is always better than waiting for HMRC to find them first. Here are the nine we see most often.

1. Registering for VAT too late

The most expensive mistake usually happens before a business is even registered. You must register once your taxable turnover passes £90,000 in any rolling 12 month period, not your accounting year. Plenty of growing businesses only check at year end and discover they crossed the threshold months earlier.

Register late and HMRC will expect VAT on everything you sold from the date you should have registered, whether or not you charged it to your customers, plus a possible penalty on top. If your turnover is getting close, start monitoring it monthly. Our VAT registration service handles the timing, the scheme choice and the HMRC paperwork.

The threshold is rolling, not annual. Check your last 12 months of taxable turnover every month, not once a year. The £90,000 figure applies from 1 April 2024 and is correct as at June 2026.

2. Charging the wrong VAT rate

The UK has three VAT rates: standard at 20%, reduced at 5% and zero at 0%. Some supplies are exempt entirely, and some fall outside the scope of VAT altogether.

Overcharge, applying 20% where something should be zero rated or exempt, and you have collected VAT you should not have. Undercharge, and you owe HMRC the difference across every affected transaction. The areas where businesses most often get the rate wrong:

• Food and drink, where the line between zero rated and standard rated can be surprisingly fine
• Children's clothing and footwear (zero rated) versus adult sizes (standard rated)
• Construction work, where the rate depends on whether the building is new, residential or commercial
• Healthcare and treatments, where some services are exempt and others are not
• Digital services and software, where the rules have shifted in recent years

3. Reclaiming VAT you are not entitled to

Input VAT can only be reclaimed on goods and services used for VATable business purposes, supported by a valid VAT invoice. This is one of the areas HMRC scrutinises most closely. Common errors include:

• Reclaiming VAT on car purchases, where only certain business uses qualify
• Claiming VAT on client entertaining, which HMRC does not allow
• Reclaiming on invoices addressed to a different company or person
• Claiming on receipts that do not show a VAT number
• Reclaiming the full VAT on mixed business and private expenses without apportioning

If you have been over-reclaiming, the fix is to correct the relevant returns and repay the difference, usually with interest.

4. Missing legitimate VAT reclaims

The other side of the coin costs you money rather than creating a liability. It is especially common where the bookkeeping is done quickly and purchase invoices are not checked for VAT content. Frequently missed reclaims include utility bills for business premises, professional fees such as accountancy and legal costs, equipment purchases, UK software subscriptions, and pre-registration purchases.

You can reclaim VAT from before you registered. Goods still on hand can be reclaimed up to four years back, and services up to six months back, provided they were for the business. Many newly registered businesses leave this money on the table.

5. Flat Rate Scheme errors

If you are on the Flat Rate VAT Scheme, the usual mistake is using the wrong percentage, either because the sector was identified incorrectly at the start or because the business has changed and the rate was never reviewed.

The limited cost trader rule catches people out. If your spending on goods is less than 2% of your VAT inclusive turnover, or less than £1,000 a year, you must use 16.5% regardless of your sector rate. Many businesses joined the scheme before this 2017 rule and have never rechecked. At 16.5%, the scheme is rarely worth it.

Other errors include reclaiming VAT on purchases (the scheme generally does not allow this, except certain capital assets over £2,000) and applying the flat rate to the wrong turnover figure. Not sure the scheme still suits you? Our guide to flat rate vs standard VAT walks through the comparison.

6. Construction reverse charge errors

If you work in construction and deal with other VAT registered contractors, the domestic reverse charge applies to many of your supplies: the customer accounts for the VAT rather than the supplier. The most common errors are charging VAT when the reverse charge should apply, and not charging it when the standard rate should apply because the rules have been misread.

Getting this wrong creates problems for both sides of the invoice, and HMRC has been increasingly active here. If CIS and the reverse charge both apply to your business, it is worth having construction specialist support rather than working it out invoice by invoice.

7. VAT on deposits, prepayments and credit notes

Timing matters as much as the rate. VAT generally becomes due at the tax point, which for most sales is when the invoice is issued or payment is received, whichever comes first. That causes problems with deposits (VAT is due when the deposit arrives, not when the final invoice is raised), advance payments, credit notes that are not processed correctly, and sale or return arrangements where the tax point rules differ.

8. VAT coding errors in bookkeeping software

A large share of ongoing VAT mistakes do not come from misunderstanding the rules. They come from incorrect VAT codes in bookkeeping software, silently applying the wrong treatment to every transaction in that category.

If a supplier was set up with the wrong code, every invoice from them may have been treated incorrectly across multiple returns without anyone noticing. The same goes for sales codes. A periodic review of the VAT codes in Xero or QuickBooks is one of the simplest ways to catch this early.

9. Not reconciling your VAT return to your bookkeeping

Your return figures should reconcile directly back to your bookkeeping records. If they do not match, something has gone wrong in the books or in how the return was compiled. This happens most where figures are transferred manually instead of submitted through MTD compliant software, introducing transposition errors, wrong-period figures or missing transactions.

What to do if you find an error

The right response depends on the size of the error.

The correction thresholds, as at June 2026: you can adjust a net error on your next VAT return if it is £10,000 or less, or up to £50,000 where it is also under 1% of your box 6 turnover. Anything larger, or any deliberate error, must be disclosed to HMRC separately using the error correction process. These figures can change, so confirm the current position before correcting.

The key thing is not to ignore it. Voluntary disclosure of a genuine mistake is treated far more favourably than an error HMRC discovers itself, and errors left to compound over several quarters become significantly more expensive to resolve.

Frequently asked questions

How far back can HMRC go for VAT errors?

Four years for genuine mistakes and careless errors. Where HMRC believes the error was deliberate, the window extends to 20 years. Interest applies either way, and penalties scale with the behaviour behind the error: roughly up to 30% for careless, 70% for deliberate, and 100% for deliberate and concealed.

Do I have to tell HMRC about every VAT error?

Not separately. Net errors of £10,000 or less (or up to £50,000 if under 1% of your box 6 figure) can be corrected on your next return. Larger or deliberate errors need a formal disclosure. Either way, keep a record of what the error was and how you corrected it.

Can I reclaim VAT on things I bought before registering?

Yes, in certain circumstances. Goods you still hold can be reclaimed up to four years back, and services up to six months back, provided they were bought for the business that is now registered. The claim usually goes on your first VAT return.

What is the VAT registration threshold?

£90,000 of taxable turnover in any rolling 12 month period, as at June 2026. You can also register voluntarily below the threshold, which is sometimes worthwhile if your customers are VAT registered and you have significant input VAT to reclaim.

Not sure if your VAT is right?

At HLS Accounts in Cardiff, we carry out VAT health checks for businesses across South Wales, reviewing your VAT scheme, recent returns and bookkeeping to find errors and missed reclaims before they become a problem.

Book a free consultation or call us on 02922 805941.