Preparing your VAT Return involves more than entering figures into accounting software. You need to check your business expenses, confirm the VAT you can reclaim and make sure your records support the figures you submit to HMRC.
For small businesses, it can be easy to overlook a purchase invoice, claim VAT on a personal expense or use the wrong VAT treatment. These mistakes can lead to an incorrect return and additional work later.
The good news is that a regular review of your VAT records can help you avoid common errors, claim eligible input VAT and manage your business finances with greater confidence.
Understand how VAT on business expenses works
If your business is VAT registered, you can generally reclaim VAT on eligible goods and services purchased for your business and used to make taxable supplies. The VAT you reclaim is known as input tax.
The VAT you charge on your sales is known as output tax. When completing your VAT Return, you calculate the difference between the relevant output tax and recoverable input tax, taking account of any applicable adjustments.
Not every business expense allows you to reclaim VAT. You must meet the relevant conditions and retain suitable evidence to support your claim. HMRC’s guidance on reclaiming VAT on business expenses explains the main rules.
Check your purchase invoices
One of the first steps in reviewing your VAT records is to check that you have the right evidence for your purchases.
Before reclaiming VAT, review your supplier invoices and confirm that:
- The supplier details are correct.
- The invoice contains the required VAT information.
- The VAT amount matches the amount you are claiming.
- The purchase relates to your business.
- The expense falls within the correct VAT accounting period.
- The VAT is eligible for recovery.
You generally cannot reclaim VAT using an invalid invoice, a pro forma invoice, a statement or a delivery note alone.
If an invoice contains incorrect information or the VAT amount appears wrong, contact the supplier and request a corrected invoice before making the claim. HMRC’s VAT record keeping guidance explains the evidence businesses need to retain.
Review your everyday business expenses
Many businesses incur regular costs throughout the year. Reviewing these purchases can help you identify eligible input VAT that may otherwise be overlooked.
Depending on your business and the applicable VAT rules, costs may include:
- Office supplies and stationery
- Business software and subscriptions
- Business telephone and internet services
- Equipment and tools
- Repairs and maintenance
- Business premises costs
- Professional services
- Qualifying business travel costs
Remember that a cost being allowable for Income Tax or Corporation Tax does not automatically mean the VAT can be reclaimed.
Each purchase must be reviewed under the VAT rules. Check the purpose of the expense, the VAT shown on the invoice and whether any restrictions apply before including it on your VAT Return.
Separate business and personal expenses
If you use something for both business and personal purposes, you generally need to restrict the input VAT claim to the business proportion.
For example, if you use your mobile phone for work and personal calls, you should not automatically reclaim all the VAT on the phone and its service plan.
Instead, calculate the business proportion using a reasonable method and keep records showing how you arrived at the figure.
The same principle can apply to certain household costs when you work from home. The amount you can reclaim depends on the actual business use and the relevant VAT rules.
HMRC’s guidance on business expenses and VAT provides examples of how to calculate the business proportion.
Understand which expenses have VAT restrictions
Some expenses are subject to specific restrictions, even when they are connected with running a business.
Pay particular attention to the following areas.
Business entertainment
VAT on business entertainment and hospitality provided to customers or other business contacts is generally not recoverable. Different rules may apply to entertainment provided to employees.
Do not assume that VAT can be reclaimed simply because the cost was incurred while building business relationships.
Cars and fuel
VAT on cars is subject to special rules. You may be unable to reclaim VAT on the purchase of a car unless the relevant conditions or exceptions apply.
Fuel, vehicle hire, repairs and maintenance can also have specific rules, particularly where a vehicle is used for both business and private journeys.
Keep mileage records and supporting invoices, and check the correct treatment before claiming VAT.
Personal purchases
VAT on goods or services used solely for personal purposes cannot normally be reclaimed by the business.
Where there is mixed use, only the eligible business proportion may be recoverable, subject to the applicable rules.
For more information, consult HMRC’s VAT guide.
Check whether your business uses the flat rate scheme
If your business uses the VAT Flat Rate Scheme, the rules for reclaiming VAT on purchases are different.
You generally cannot reclaim VAT on ordinary business purchases under this scheme. An exception may apply to certain capital asset purchases costing £2,000 or more, including VAT, where the relevant conditions are satisfied.
Before claiming input VAT, check which VAT accounting scheme your business uses and whether the purchase qualifies for an exception.
Review credit notes and supplier adjustments
Credit notes and corrections can affect the VAT you report.
If a supplier issues a credit note because goods have been returned or a price has changed, make sure the adjustment is reflected correctly in your records.
You should also review credit notes issued to customers and any other transactions that affect the VAT charged or reclaimed.
Leaving these adjustments out could result in an incorrect VAT Return.
Reconcile your VAT records before submission
Your VAT Return should agree with your underlying accounting records.
Before submitting it, compare the figures in your accounting software with your purchase invoices, sales invoices, credit notes and business bank records.
Check that:
- All relevant purchases have been recorded.
- Supplier invoices have not been entered twice.
- VAT rates have been applied correctly.
- Input VAT claims agree with supporting invoices.
- Sales and output VAT figures are complete.
- Adjustments have been recorded correctly.
- Transactions are included in the appropriate accounting period.
A careful reconciliation can help identify missing invoices, incorrect VAT codes and duplicated transactions before they affect your return.
Keep accurate digital VAT records
Most VAT registered businesses must follow Making Tax Digital for VAT requirements unless an exemption applies.
This generally means maintaining the required VAT records digitally and submitting VAT Returns through compatible software.
Your records should cover the VAT charged on sales, VAT incurred on purchases, relevant transaction values and dates, and adjustments made to returns. If you use more than one software product, the required digital links between the systems must be maintained.
HMRC also requires VAT records to be kept for at least six years in most cases. Certain schemes have different retention requirements.
See HMRC’s guidance on keeping VAT records for details.
Check the deadline and payment amount
Most VAT registered businesses submit VAT Returns every three months, although other accounting arrangements are available.
The usual deadline for submitting a VAT Return online is one calendar month and seven days after the end of the accounting period. The payment must normally reach HMRC by the same deadline.
Even when there is no VAT to pay or reclaim, you must still submit the return if you are required to do so.
Check your VAT online account for the exact deadline and payment information for your business. You can find further information in HMRC’s guidance on submitting VAT Returns.
Correct errors as soon as you identify them
If you discover a mistake in a previous VAT Return, do not ignore it.
The correction method depends on the amount and nature of the error. Some errors can be adjusted on a later VAT Return, while others must be reported separately to HMRC.
Keep a record of what went wrong, when you identified the error, the amount involved and how you corrected it.
For the current reporting thresholds and correction process, follow HMRC’s guidance on correcting VAT Return errors.
Use a practical VAT review checklist
Before submitting your next VAT Return, check the following:
- All purchase and sales invoices are recorded.
- The correct VAT rates have been applied.
- Input VAT claims are supported by valid evidence.
- Personal and business costs have been separated.
- Restricted expenses have been reviewed.
- Credit notes and adjustments are included.
- Your accounting records have been reconciled.
- Your digital records are complete.
- The VAT figures have been checked.
- The submission and payment deadlines are recorded.
Following this routine each quarter can help reduce mistakes and make VAT compliance easier to manage.
How Tax2u can help
Reviewing VAT business expenses can be complicated, particularly if your business has mixed use costs, vehicle expenses, multiple VAT rates or a large volume of transactions.
At Tax2u, we help businesses with:
- VAT Return preparation and submission
- VAT records and bookkeeping reviews
- Input VAT and expense checks
- VAT reconciliations
- Making Tax Digital for VAT
- Identifying and correcting VAT errors
- Ongoing HMRC compliance support
Our team can review your figures, help you understand which expenses qualify for VAT recovery and ensure your records are organised for your next return.
Final thoughts
Reviewing your business expenses before submitting a VAT Return can help you identify eligible input VAT, avoid unsupported claims and reduce the risk of errors.
Keep your purchase invoices, separate business and personal costs, check any applicable restrictions and reconcile your records before submission. If you discover a mistake, use the appropriate HMRC correction process rather than leaving it unresolved.
If you need help reviewing your VAT records or preparing your VAT Return, get back to us at Tax2u. Our team is here to help you keep your records accurate, reclaim eligible VAT and stay compliant with HMRC.