🚨 5 Common VAT Mistakes That Trigger HMRC Audits
HMRC doesn't have the resources to audit everyone. Instead, their sophisticated "Connect" computer system looks for statistical anomalies and common error patterns in VAT returns.
If your return looks "odd" compared to your industry peers or your past history, you might get a letter.
Here are the 5 most common data mistakes that trigger these red flags—and how to avoid them.
1. Reclaiming VAT Without a Valid Invoice
The Mistake: You paid for something, you have a credit card receipt, so you reclaim the VAT. The Rule: You cannot reclaim VAT without a valid VAT invoice (for purchases over £250). A credit card slip is often not enough.
The Fix: Ensure you have the actual PDF or paper invoice stored and linked to the transaction. VATextract stores the original document right next to the data, so you always have your "digital paper trail" ready.
2. The "Entertainment" Trap
The Mistake: Reclaiming VAT on client entertainment. The Rule: VAT on business entertainment (taking clients to lunch, golf days, etc.) is blocked. You cannot reclaim it. VAT on staff entertainment (Christmas party) is generally allowed.
The Fix: specific GL codes for "Client Entertainment" vs "Staff Welfare" and ensure your VAT return software excludes the former.
3. Mathematical Errors (The "Fat Finger" Problem)
The Mistake: Typing £1,000.00 instead of £100.00, or manually calculating 20% and getting it wrong by a penny due to rounding. The Rule: HMRC expects precision. Large, round-number discrepancies often trigger automated flags.
The Fix: Stop manual entry. Using AI extraction (OCR) ensures that the numbers in your system match the numbers on the invoice exactly.
4. Reclaiming VAT on Exempt Suppliers
The Mistake: Assuming every supplier charges VAT. Small businesses (under the £90k threshold) or certain industries (insurance, some education) are VAT exempt. The Rule: If there is no VAT number on the invoice, there is no VAT to reclaim—even if the total price looks like it includes it.
The Fix: Check every invoice for a VAT number. If it's missing, the VAT amount is £0.00.
5. Duplicate Invoices
The Mistake: Paying (and reclaiming) the same invoice twice. This often happens when a supplier sends an invoice by email, and then sends a "statement" later that gets processed as a new invoice. The Rule: Reclaiming the same input tax twice is a serious error.
The Fix: Use a system that flags duplicates. VATextract warns you instantly if you try to upload an invoice with the same Supplier + Invoice Number + Date combination.
How to Sleep Easier
Compliance isn't about being a tax expert; it's about having clean data.
Most audits are triggered by simple data entry errors, not complex tax evasion schemes. By automating your data capture, you remove the "human error" element almost entirely.
- Validate every VAT number.
- Store every original document.
- Automate the data entry.
Want to audit-proof your process? Start your free trial of VATextract today.