Five things you need to do to avoid VAT penalties

Five things you need to do to avoid VAT penalties

Only five things? At the moment… There are plenty of things you need to do, these are just some of those that you are unlikely to find written down anywhere yet can help you when HMRC carry out an inspection of your books and records. Let’s pile in.

1. Accounting system

Make sure your accounting system is set up to handle your VAT requirements. This applies even if you have yet to register for VAT. If you take the time at the start to make sure your accounting system can handle VAT, and is capable of being changed easily just in case your business changes, you’ll have less trouble making the transition when you do register for VAT.

2. Are you about to branch out into a business line that is new to you?

Have you considered what the VAT treatment is?

This might seem to be an innocuous area yet is fraught with dangers for the unwary – as is most of VAT! For example, what if you decide to sublet part of your premises: do you charge VAT on the rent? If the answer is no do you know what the impact on your recovery of VAT on your expenses is?

Areas where you might need help:

  • Exports of goods or services;
  • property letting;
  • property buying and selling;
  • property development;
  • retail schemes;
  • special accounting schemes;
  • motoring expenses

to name just a few.

3. What if you make a mistake?

Put it right as soon as you find it. A trite answer, although possibly the best answer too. It’s important that you put in place simple procedures to make sure that you review your accounts for errors regularly. If you do the review before you submit your VAT return you will be able to correct the errors at the best time. If something gets past your checks at this point you need to have a review that will give you a second bite at that particular cherry. This time, however, the return will have been submitted and you’ll have to decide whether you can correct the error on your next VAT return or whether you have to tell HMRC immediately.

The rules on error correction can be found in HMRC’s VAT Notice 700/45: How to correct VAT errors and make adjustments or claims.

4. Coping with a VAT inspection

At some point you will have a VAT inspection. This will no doubt make you anxious, even if you follow all the advice you get on doing your VAT and how to avoid penalties. Apart from anything else it interrupts your business. The aim is to get the VAT inspector to leave you as soon as possible.

You need to do a little preparation:

  • have your records and accounts ready;
  • keep a note of what is discussed, particularly the things the VAT inspector looks at;
  • keep a note of any comments the VAT inspector makes and ask for any rulings to be given to you in writing.

In the event that there’s a dispute with HMRC this information will help a VAT specialist deal with the matter more quickly.

5. Have a written VAT Policy

Yawn! Yes it’s boring, tedious and dull yet has the ability to help you avoid penalties because it sets out what you will do concerning VAT in most situations. For the larger business it will also say who is responsible for certain parts of the VAT accounting system.

The good news is that if you follow the advice in the previous four points you are well on your way to having a VAT policy. Now write it down and keep it safe.


Remember the aim of these points is to help you avoid VAT penalties. You might think that you have no need to do any of these things because you have, so far, avoided being penalised. That’s good. The benefit of these pointers is that they’ll help keep you penalty free even when HMRC do find a mistake.

Wondering whether you need to pay for some help? Look on it as an investment that will save you more than it costs in the long term.

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