Common VAT mistakes and how to avoid them

Overview

VAT is one of the most error-prone areas of business accounting. HMRC’s compliance checks look for exactly the mistakes covered in this article. AccBooks has built-in checks to flag most of these automatically — but understanding the rules helps you review AccBooks’ suggestions intelligently.

Mistake 1: Reclaiming VAT on non-business expenses

What happens: Input VAT can only be reclaimed on expenses used for business purposes. Entertainment expenses (taking clients to restaurants or events) are specifically blocked.

In AccBooks: The Client entertaining nominal code (6400 by default) is configured as blocked for VAT reclaim. Any transaction posted to it shows input VAT as zero, regardless of the VAT on the supplier invoice.

The fix: Don’t post entertaining expenses to a general overhead code where VAT would be reclaimed by default.

Mistake 2: Missing the VAT registration threshold

What happens: Businesses must register for VAT when their taxable turnover exceeds £90,000 in any rolling 12-month period. Many miss the point at which they cross the threshold.

In AccBooks: Go to Reports → VAT threshold monitor. AccBooks shows your rolling 12-month taxable turnover and alerts you when you’re within £10,000 of the threshold.

Mistake 3: Charging VAT before registration

What happens: Charging VAT on invoices before HMRC has issued a VAT registration number is illegal. However, if your application is pending, you can raise invoices showing a VAT amount with a note that the VAT number will be provided once issued.

Mistake 4: Wrong VAT treatment on mixed supplies

What happens: Some goods and services span multiple VAT categories. For example, a cold takeaway sandwich is zero-rated but a hot toasted sandwich is standard-rated.

AccBooks approach: For businesses with complex supply mixes, use the Override VAT treatment option on individual line items within an invoice, rather than setting a single treatment for the whole invoice.

Mistake 5: Forgetting reverse charge

What happens: UK businesses regularly forget to account for reverse charge on software subscriptions from US/EU companies (Salesforce, AWS, Zoom, etc.). HMRC has flagged this in many compliance checks.

In AccBooks: Enable Overseas reverse charge auto-detection under Settings → VAT. AccBooks analyses supplier names against a database of known overseas digital service providers and flags transactions for review.

Mistake 6: Using the wrong date for VAT

What happens: Under accruals-based VAT, the tax point (the date VAT becomes due) is normally the invoice date, not the payment date. Some businesses incorrectly use the payment date.

In AccBooks: Transactions are taxed based on the invoice date shown on the purchase or sales document, not the bank transaction date. If you’re on cash accounting, AccBooks switches to using the payment date automatically.

Mistake 7: Not adjusting for private use

What happens: If a business asset (e.g., a company car or computer) is used partly for personal purposes, only the business proportion of input VAT can be reclaimed.

In AccBooks: When posting a purchase with mixed use, enter the Business use % in the transaction detail. AccBooks calculates the reclaimable VAT accordingly and posts the non-reclaimable portion to the expense account.

Mistake 8: Missing the de minimis limit for partial exemption

What happens: If you make some exempt supplies, you may not be able to reclaim all input VAT. But if your exempt input VAT is below the de minimis limit (£625/month and no more than 50% of total input VAT), you can treat all input VAT as reclaimable.

In AccBooks: The partial exemption calculation includes the de minimis test automatically. Check VAT → Partial exemption after each return to see whether you qualify.

AccBooks’ built-in VAT health check

Before filing any VAT return, click Run VAT health check on the return preparation screen. AccBooks scans for all of the above issues and flags any it finds. Review each flag and either correct it or add a note explaining why the flag is expected.