Making a VAT-related mistake can end up being costly – not only will HMRC expect any outstanding VAT to be paid, but they might also levy penalties and interest. With VAT being complex for the profession to navigate, it’s not surprising that cases have been brought.
Take the 1991 case involving the RSPCA. This concerned activities such as running animal homes, providing veterinary services and maintaining an inspectorate. Some activities were not business related. However, the provision of veterinary services was a business, and so was the making of taxable supplies.
Then there was the case in 2012 involving the People’s Dispensary for Sick Animals. Here the charity provided welfare and charitable services for animals belonging to those unable to afford a vet. The Pet Aid scheme was introduced by the charity and operated through a network of Pet Aid hospitals. In areas too small for a Pet Aid hospital, the PDSA arranged for local practices, known as Pet Aid practices, to treat pets free of charge to owners registered under the scheme.
The PDSA claimed that the Pet Aid scheme was an economic activity because of the financial scale of the operation; the degree of administrative resources and professional expertise required to run it; the fees paid by pet owners to gain eligibility; and the fact that the scheme had been run since 1993. However, it was held that the Pet Aid scheme was a non-business activity and HMRC won the case.
So what do veterinary practices need to look out for to avoid making devastating VAT mistakes?
What are the common VAT mistakes that could easily get a practice into hot water?
Not registering
A fundamental but surprisingly common mistake is not registering for VAT when required. Very broadly, a UK-based business is required to register for VAT if the total VAT-taxable turnover in the last 12 months was over the VAT registration threshold (currently £85,000) or is expected to go over the threshold in the next 30 days.
The first (backwards-looking) test has to be considered at the end of every month – something which can be easily missed if a business is not up to date with its records or only speaks to its accountant once a year.
The second (forward-looking) test has to be considered every day. In practice, it is probably less likely to be met than the backwards look.
A fundamental but surprisingly common mistake is not registering for VAT when required
Once either of the conditions of the tests is met, the business needs to register for VAT with HMRC within 30 days. If it’s late, HMRC will not only ask it to pay VAT on any sales made since the date it was supposed to be registered but can also charge a penalty of up to 100 percent of the unpaid VAT.
Not deregistering
At the other end of the spectrum, businesses may not spot when they can, or indeed have to, deregister from VAT.
Once registered for VAT, if a business ceases to trade or make VAT-taxable supplies, it has to tell HMRC to cancel its registration within 30 days. As with failure to register on time, failure to deregister can result in a penalty of up to 100 percent of any lost VAT revenue.
Once registered for VAT, if a business ceases to trade or make VAT-taxable supplies, it has to tell HMRC to cancel its registration within 30 days
If the business continues but shrinks so that it falls back below the VAT registration threshold, it can also choose to voluntarily deregister from VAT. While deregistering may bring advantages in terms of not having to charge VAT and file VAT returns, there are downsides as well. For example, it may need to account for any VAT on stock or assets in hand at the date of deregistration and will lose the ability to reclaim any VAT it incurs on purchases. The pros and cons should be carefully considered before deciding on whether to stay VAT registered, as getting it wrong could be a costly mistake.
Claiming without a valid invoice or not issuing a valid invoice
Generally, a practice can’t reclaim any VAT it has paid unless it has a valid VAT invoice. This needs to contain specific information, including the amount and rate of VAT charged and the VAT registration number of the supplier. Importantly, it can’t claim VAT back using an invalid invoice, a pro forma or a delivery note. It’s therefore important to check that it receives the right kinds of invoices from its suppliers. Otherwise, HMRC could ask the business to pay them back any VAT it has reclaimed, along with interest and penalties.
VAT-registered businesses also have a legal requirement to provide a valid VAT invoice to their VAT-registered customers. However, general retailers such as shops don’t have to issue a VAT invoice, unless specially requested.
Keep track of points and payments
In January 2023, the previous default surcharge regime, which applied to late VAT return filing and late payment of VAT, was replaced by a new penalty system. This new system can easily trip people up, causing businesses to make VAT-related mistakes.
Broadly, under the new late filing penalty regime, a business will get a penalty point each time it files a VAT return late. Once the points reach a certain threshold (four points for quarterly returns), a £200 penalty will be charged. Each subsequent late submission will also incur a further penalty until the points expire following a period of good behaviour.
The way these new penalties work means that, unlike under default surcharge, a practice can now receive a late filing penalty even if it usually files nil returns, or claims a repayment of VAT.
It’s therefore important to keep track of any penalty points to ensure the practice doesn’t end up with a penalty. This can be done by logging into the business’s online HMRC business tax account.
A business will get a penalty point each time it files a VAT return late
The new late payment regime for VAT applies graded penalties based on how late the business is in paying or in arranging extra time to pay with HMRC. Until 31 December 2023, HMRC didn’t impose any late payment penalty provided there was full payment within 30 days of the deadline – however, this grace period dropped to 15 days from 1 January 2024. It’s therefore important that businesses make sure they pay their VAT (or get in touch with HMRC if they are struggling to pay) within the right window to avoid a penalty. Even if no penalty applies, HMRC will still charge interest at the base rate plus 2.5 percent on any late payment made, so it’s always worthwhile paying as soon as possible.
Reclaiming more than the business is entitled to
A common error made by VAT-registered businesses is to assume that they can reclaim VAT on all of their expenses. However, some expenses won’t have VAT charged in the first place because they are zero-rated or exempt. Common examples include insurance, and bus and train travel. There are also special rules which block the business from claiming VAT back on certain expenses – for example, it can’t claim VAT incurred on entertaining clients.
Some expenses won’t have VAT charged in the first place because they are zero-rated or exempt
One area where there are lots of special rules, and it’s easy to make a mistake, is motoring expenses. As a general rule, a business can’t claim VAT back when it buys a car (unless it bought the car to sell on or hire out as part of the business, is a taxi driver or driving instructor, or can prove that the car is never available to employees or anyone else for private use). If instead of buying a car, it is leased, then generally only 50 percent of the VAT charged on the lease payments can be recovered. Recovering VAT on petrol or diesel is also tricky – broadly, a practice can choose either to only claim the VAT back on fuel used for business miles (it will need mileage records to support this), or to claim all the VAT back and pay a fuel scale charge to account for any private use. Whichever option is chosen, it must be applied across the whole business fleet.
And where the practice is a sole trader or partnership, it also needs to watch out for the rules on personal use. If an expense has business and personal use, it can only claim the VAT on the business element. For example, if there is a mobile phone where a quarter of the calls are personal, it can only reclaim the VAT on 75 percent of the costs associated with that phone.
Fundamentally, where VAT is claimed which the practice is not entitled to, it will have to repay HMRC and may be liable to penalties and interest.
Missing bad debt claims
In a time when businesses across the UK are feeling the squeeze, it’s important they don’t miss out on the chance to claim VAT bad debt relief.
If a practice has supplied a client with goods or services and they haven’t paid, it may be able to claim the VAT back from HMRC. It must have already paid the VAT over to HMRC and written the debt off in its books – if there’s a good chance that it might still be paid, it is unlikely to be able to get relief. The debt also must have been unpaid for at least six months.
One thing that’s easily missed is that these rules are cut both ways – if the practice has purchased goods or services and not paid the supplier six months after the due date, HMRC will expect the repayment of any VAT recovered on that purchase. Failure to do so could result in interest and penalties.
Getting groups wrong
Forming a VAT group can have distinct advantages. For example, a VAT group only submits a single VAT return covering all members, and supplies between VAT group members can generally be disregarded for VAT purposes.
However, there are a number of complications VAT group members need to be aware of.
One thing to watch for once the group is in place is that the various thresholds and limits for VAT will apply to the group as a whole, and not the individual members: for example, the £10,000 limit for correcting an error on the next return and the payments on account threshold of £2.3 million. This could see these rules taking effect earlier than expected.
Finally, while the general rule is that supplies between group members are ignored for VAT purposes, there are special rules to be aware of if the business is a UK VAT group member and acquires services from an overseas group member.
Summary
VAT is a quagmire ready to swallow up all who come across it. With so many quirks, foibles and traps set up it’s important to take good advice; even those who consider themselves au fait with VAT can make mistakes which are expensive to resolve.
