Running a business comes with a long list of responsibilities, and staying on top of tax rules is high on that list. One of the key areas where many businesses slip up is VAT compliance. Even honest mistakes can lead to serious issues, including HMRC penalties or even legal action.

The good news? Most of these errors are avoidable with a bit of care and attention. Here’s a closer look at the most common VAT mistakes that catch UK businesses out.

Late or Missed VAT Registration

Businesses must register for VAT if their taxable turnover exceeds £90,000 in any 12-month period. Some wait too long to register, either due to confusion or oversight. However, once that threshold is crossed, the business will have 30 days to complete the process. Failing to register on time may result in backdated charges and HMRC penalties.

It’s wise to check your turnover regularly and take action before reaching the threshold. Registration can be completed quickly online through the HMRC portal, so there’s no excuse for delays.

Misclassifying Goods and Services

Not all goods and services carry the same VAT rate. Some are standard-rated, others are zero-rated, and some are exempt altogether. Confusing these categories can lead to incorrectly charging the wrong amount or reclaiming VAT. This can raise red flags with HMRC and cause complications later.

To avoid problems, always check current guidance on VAT rates for your specific goods or services. Keeping software up to date can also help with accurate classifications.

Errors in VAT Returns

Many businesses run into trouble due to simple errors in their VAT returns. These might include incorrect figures, missed entries, or poor rounding. Unfortunately, even small mistakes can lead to big consequences. If HMRC sees repeated or serious errors, they may apply HMRC penalties of up to 100% of the unpaid VAT.

It’s important to double-check every return before submission. If an error does slip through, you can report and fix it using form VAT652. Doing so shows you’re taking steps to be fully compliant.

Poor Record Keeping

VAT rules require businesses to keep clear invoices, receipts, and calculations records for at least six years. Some businesses fall short by relying on scattered files or paper-only systems. Poor record keeping makes it hard to defend your numbers during an HMRC check and increases the risk of fines.

The best solution is to use accounting software that stores records securely and allows quick access during inspections.

Ignoring Rules Around Imports and Exports

Trading internationally brings extra VAT responsibilities. For imports, you’ll need documents like the C79 certificate to reclaim input VAT. Exports often qualify for zero-rating, but only if you have the right evidence. Skipping these steps or misunderstanding the rules can put your business at risk.

Get specialist advice if your business trades across borders. Taking time to get the details right can prevent costly delays or disputes.

Missing Deadlines

Late filing or payment of VAT is another common issue. If you miss deadlines repeatedly, surcharges increase and could reach 15% of the unpaid amount. These HMRC penalties can stack up quickly and hurt cash flow.

Use reminders, keep VAT funds in a separate account, and make filing part of your regular schedule to avoid slipping behind.

Mistaken Input VAT Claims

You can only reclaim input VAT on purchases directly related to your business. Claiming on personal expenses or without valid receipts can lead to repayments being denied. Worse still, HMRC may view it as careless or deliberate.

Make sure each claim is backed by proper evidence and relates clearly to your business activity.

Final Thoughts

Good VAT compliance comes down to paying attention to detail, keeping solid records, and acting early. HMRC doesn’t always treat mistakes kindly, even when unintentional. Getting familiar with key rules and keeping up with your VAT registration status helps you avoid issues before they start.

If you’re unsure about anything—such as classification, cross-border VAT, or return errors—it’s worth speaking to a tax professional. Getting it right now could save you from serious HMRC penalties later.