Regular check ins help prevent errors that can lead to HMRC penalties.
At a glance
- Understanding the four VAT schemes helps match clients to their best option.
- Monthly account checks help prevent errors that lead to HMRC penalties.
- From April 2025, late payment penalties will jump to 10%.
While VAT may not be the most thrilling topic at networking events, it’s an area where accounting professionals can truly save the day for small businesses.
As clients struggle with confusing thresholds, bewildering schemes and ever-changing rules, accountants who genuinely understand VAT stand out. Especially as the consequences of poor VAT management have never been more severe – HMRC issued £851 million in VAT penalties in 2022/23, a staggering 25% increase year-on-year.
This guide explores the aspects of VAT advisory that matter most to your clients, helping you deliver value beyond basic compliance work.
The basics
VAT is a consumption tax applied at each stage of production and distribution where value is added, with the final consumer bearing the ultimate cost.
When advising clients, explaining these three points can help set solid foundations.
- Registration requirements: mandatory registration is triggered at the £90,000 threshold, with a 30-day notification window. Accountants can register clients through their HMRC Agent Services Account. Voluntary registration benefits businesses with significant VATable purchases or those working primarily with VAT-registered clients.
- VAT rates and exemptions: different categories of goods and services attract different VAT treatments. The four categories, standard-rated (20%), reduced-rate (5%), zero-rated (0%) and exempt, each have distinct implications for businesses’ accounting and cash flow.
- Operational impact: beyond the tax itself, VAT registration introduces new record-keeping requirements, potential pricing adjustments and administrative processes that clients must integrate into their operations.
Amy Knight, small business expert at NerdWallet UK, says the cost of getting it wrong can be significant.
“Many VAT compliance errors stem from poor record-keeping or confusion about the rules rather than deliberate avoidance – but ignorance is no excuse,” she says.
“Failing to register for VAT on time is a basic and common error, and it can land a business with a penalty of between 5% and 15% on top of VAT owed.”
Choosing the right VAT scheme
Once a business registers for VAT, selecting the most appropriate accounting scheme can significantly reduce administrative burden and improve cash flow, while the wrong one can create unnecessary complications.
Jess Middleton, founder of MPAS UK & Anaptyx, emphasises the importance of matching schemes to business operations.
“There’s no one-size-fits-all here. Your VAT scheme should work with your client’s cash flow and the way their business actually runs,” she says.
Each of the four main schemes serves different business needs.
- Standard VAT accounting is the default approach where businesses account for VAT based on invoice dates, regardless of when payment occurs.
- Cash accounting scheme allows businesses to account for VAT only when they receive payment from customers or pay suppliers. Vipul Sheth, Managing Director of Advancetrack, says, a “service-based business with low overheads may benefit from the Flat Rate Scheme for its simplicity, while businesses offering credit terms might find the Cash Accounting Scheme more appropriate”.
- Flat rate scheme simplifies VAT calculations by applying a fixed percentage to gross turnover. Available to businesses with VAT turnover below £150,000, it reduces record-keeping but may not be cost-effective for companies with substantial VATable expenses.
- Annual accounting scheme requires just one return per year with nine monthly or three quarterly payments on account. This requires disciplined cash management.
Consider your client’s specific circumstances when recommending a scheme, including their payment terms, expense patterns, growth trajectory and administrative capacity.
Handling VAT errors and compliance
Even with careful planning, VAT errors happen. When they do, knowing how to address them quickly can save clients from substantial penalties. Knight says proactive management is important.
“If you do make errors on a VAT return, the first step should be to notify HMRC by correcting the error online or filling in a VAT652 form,” she says.
“Calculate any corrections that need to be made and submit the form promptly.”
“Many VAT compliance errors stem from poor record-keeping or confusion about the rules rather than deliberate avoidance – but ignorance is no excuse.”
Amy Knight, small business experT, NerdWallet UK
Smaller errors (below £10,000 or between £10,000 and £50,000 but less than 1% of the total value of your sales) can typically be corrected on the next VAT return. Larger mistakes require formal disclosure to HMRC through a voluntary disclosure or by amending the affected return.
Middleton offers practical advice for prevention. “Reconcile your accounts monthly – not just before the VAT return,” she says. “It stops things from building up and getting messy,” she says.
Implementing firmwide systematic pre-submission reviews and maintaining digital record-keeping systems remain the most effective strategies for ensuring clients stay penalty-free.”
Late payment interest increase
From April 2025, HMRC will increase late payment interest from 2.5% to 4% above Bank of England base rate. Late payment penalties will rise sharply, from 2% to 3% for payments 15-30 days late and, most significantly, from 4% to 10% for payments over 31 days late.
With the cost of VAT mistakes increasing substantially, now is the ideal time to review client VAT processes, ensure proper scheme selection and implement regular pre-submission checks to prevent costly errors. Effective guidance can turn VAT from a compliance headache into a well managed aspect of your client’s financial operations.
More information on IFA’s Tax series, which runs throughout the year, here.
