Small business VAT pitfalls you should be aware of

If you are registered for VAT, have to file a VAT return in the near future, or are concerned about putting the wrong amounts on your VAT return, here are 5 VAT traps to watch out for.

These tips were kindly provided by Emily Coltman ACA, Chief Accountant to FreeAgent – an award-winning online accounting system for small businesses.

No charge, no claim

Unless you’re using the VAT flat rate scheme, you can usually reclaim any VAT charged to you when you incur a cost in your business.

But you can’t claim any VAT if your supplier does not charge VAT on the cost.

So, when you record your costs, make sure you choose the correct VAT rate for each particular cost—and remember that this may be none at all.

For example, I regularly stay at several Bed and Breakfasts in Edinburgh that are not registered for VAT. So when our fantastic Office Manager, Katrina, enters that cost into FreeAgent, she needs to make sure that she sets the VAT rate to 0%.

No VAT charged means no VAT to claim!

Motor and travel 1: “Sometimes VAT” costs

The cost of travel tickets, such as train fares and taxi fares, is zero-rated for VAT.

But there are two travel costs that sometimes do have VAT on them and sometimes don’t. These are carparking tickets and road tolls.

Please check your receipt for these costs to see if you’ve been charged VAT. Remember, you can’t make a claim if there’s no charge.

If you have been charged VAT, you must record this in your accounts so that you can claim it back.

Motor and travel 2: VAT on fuel

If you’re claiming VAT on the actual cost of all your motor fuel, for business and private use alike, you must add the VAT fuel scale charge to box 1 of your VAT return.

This is an extra charge that you pay to HM Revenue & Customs to compensate for the VAT you are claiming back on your private fuel.

FreeAgent can help you by including the fuel scale charge for one car on your VAT return.

However, the fuel scale charge cannot be reduced, so if you’re only using the vehicle for a little private travel, you may do well to claim VAT only on the cost of fuel used for business purposes instead.

Motor and travel 3: VAT on new cars

When you buy a car, unless your business is a taxi firm or a driving school, you can’t reclaim VAT on the cost of the car.

That could be a bit painful if you’re buying an expensive car, so be mindful of this – and remember to put the VAT to 0% when you enter the car into your books as a capital asset.

Entertaining

If you’re entertaining anyone other than employees of your business, then you can’t claim any VAT back.

This includes if you’re hosting an event for both employees and others (e.g. customers or clients) if the purpose of that event is to entertain the non-employees.

So, for a staff Christmas party where other halves are invited as well, for example, you can apportion the VAT between the cost of entertaining your employees and the cost of entertaining their partners and claim the VAT on entertaining your employees only.

But if the event is to entertain customers, you wouldn’t be able to claim back any of the VAT, even on the part of that event that related to entertaining your staff.

There is one exception: if you’re entertaining a subcontractor who is treated like a member of the team, you can claim VAT on the cost of entertaining that person to food and drink only.

Unsurprisingly, VAT is also sometimes known as Very Awkward Tax. If you’re in any doubt about what you can reclaim, speak to your accountant or a VAT expert.

Emily Coltman ACA is Chief Accountant to FreeAgent, which provides an award-winning online accounting system specifically designed to meet the needs of freelancers and small businesses. You can try it for free at FreeAgent.com.