VAT is one of those areas of business finance where the rules are more detailed than they first appear, and where the cost of getting things wrong can be significant. The penalty regime has been reformed in recent years and is now more systematic than it used to be — meaning that errors and missed deadlines accumulate into financial consequences more predictably than before.
Most VAT mistakes are not the result of carelessness. They are the result of rules that are genuinely complex, or of assumptions that turn out to be incorrect, or of processes that were set up correctly at one point and have not kept pace with how the business has changed. The following are the ones we see most commonly, along with what can be done to avoid them.
Registering Late
VAT registration becomes compulsory once taxable turnover exceeds £90,000 over any rolling 12-month period. The obligation to register arises at the end of the month in which that threshold is crossed, and registration must be completed within 30 days of that point.
Late registration is more common than it should be, usually because the threshold is approached gradually and the crossing point is not noticed until after the fact. The consequences are significant: HMRC requires VAT to be accounted for on all taxable sales back to the date registration should have occurred, regardless of whether it was charged to customers. That can mean a material liability on income for which no VAT was collected, with the business absorbing the difference.
The practical fix is monitoring turnover against the threshold on a rolling 12-month basis, not just on a calendar year. If the business is approaching £90,000 in any 12-month window, registration should be on the radar before the threshold is crossed, not after.
If you are approaching the VAT threshold and are not sure when or how to register, speak to the team at Atria before you get there. The timing and method of registration have implications worth understanding in advance.
Charging VAT on Exempt or Zero-Rated Supplies
Not all goods and services are subject to VAT at the standard rate of 20%. Some are zero-rated — VAT applies in principle, but at 0% — and some are exempt, meaning VAT does not apply at all. The distinction between zero-rated and exempt matters because it affects whether input VAT on related costs can be recovered.
Common zero-rated supplies include most food, children’s clothing, books and publications, and certain building works. Exempt supplies include most financial services, insurance, education, and health services. Applying the wrong VAT treatment — charging standard rate on an exempt supply, or treating a standard-rated supply as zero-rated — creates either an overcollection problem with clients or an underpayment to HMRC, both of which require correction and can attract penalties.
If the business supplies anything other than straightforwardly standard-rated goods or services, the VAT treatment should be confirmed rather than assumed. HMRC’s guidance is detailed, and the distinctions can be narrow enough that professional input is worthwhile.
Recovering VAT on Non-Business or Blocked Expenditure
VAT registered businesses can reclaim the VAT they pay on purchases used for business purposes — but not on everything. There are specific categories of expenditure where input VAT recovery is blocked or restricted, regardless of whether the purchase is genuinely for the business.
The most common blocked categories are: cars (unless used exclusively for business, which is a high bar), entertaining clients and suppliers, and goods or services that have a personal as well as business use. Claiming input VAT on these categories is one of the more frequent errors HMRC identifies during VAT inspections, and it tends to attract additional scrutiny because it is an area where the rules are well established.
Entertainment of employees is treated differently from client entertainment — input VAT on staff entertaining is generally recoverable, while client entertaining is blocked. The distinction matters and is worth applying correctly.
Getting the Flat Rate Scheme Wrong
The Flat Rate Scheme is available to businesses with taxable turnover below £150,000 and can simplify VAT accounting by replacing the standard method with a fixed percentage of gross turnover. The percentage varies by business sector, and the scheme can be financially advantageous depending on the business’s cost structure.
The errors that arise tend to be at the boundaries of the scheme: applying the wrong flat rate percentage for the sector, not accounting for the limited cost trader rate of 16.5% that applies to businesses where expenditure on goods is low, or remaining on the scheme beyond the point at which it is financially beneficial. The scheme also has specific rules about how to handle certain types of income and expenditure that are easy to misapply if the scheme rules are not followed carefully.
Missing Return Deadlines and Payment Dates
VAT returns are due one calendar month and seven days after the end of the VAT period. Payment is due at the same time for businesses paying electronically. Under the points-based penalty system introduced in January 2023, a penalty point is accrued for each missed return, with a £200 financial penalty triggered once a threshold number of points is reached. Separate late payment penalties apply on a tiered basis depending on how overdue the payment is.
The system is designed to be proportionate for occasional errors but to accumulate consequences for persistent non-compliance. Points are only reset after a period of full compliance, so a business that gets behind and stays behind finds its position worsening in a systematic way.
The fix is straightforward: return dates and payment dates should be in the diary well in advance, with enough lead time to prepare the return from current records rather than under pressure. Under
Making Tax Digital for VAT, submissions must be made through compatible software, which for most businesses means the submission process is more integrated and less likely to be forgotten.
Incomplete or Inaccurate Record-Keeping
VAT records must be kept for six years and must be sufficient to support the figures on each return. Under Making Tax Digital, they must also be kept digitally and the data must flow directly from the records into the return without manual transcription.
Incomplete records — missing invoices, receipts that cannot be found, transactions that cannot be explained — are a problem both because they make the return harder to prepare accurately and because they create exposure if HMRC conducts a VAT inspection. An inspector who finds that records do not support the figures on a return, or that digital requirements have not been met, has grounds to assess additional VAT and apply penalties.
Current, well-organised digital records are the most straightforward protection against this risk. For most businesses using cloud accounting software with a bank feed and a document capture tool, the record-keeping requirements are largely met as a by-product of normal bookkeeping practice.
VAT is an area where the detail matters and where the cost of getting things wrong tends to be higher than expected. If you have any uncertainty about how your VAT is being handled — the treatment of specific supplies, your record-keeping, or your return process — get in touch with the team at Atria.
This article reflects VAT rules and the penalty regime as at June 2026, including the VAT registration threshold of £90,000 and MTD for VAT requirements. Rules and thresholds are subject to change. This article does not constitute legal or financial advice. For guidance specific to your circumstances, please speak to a qualified professional.
