The most common VAT mistakes small businesses make are registering late, reclaiming VAT they are not entitled to, charging the wrong rate and filing or paying returns late. Most errors on past returns can be fixed on your next VAT return if the net error is £10,000 or less (or up to 1% of your box 6 sales, capped at £50,000); anything bigger, or anything deliberate, must be reported to HMRC separately. Late returns now earn penalty points, and late payments attract percentage penalties plus daily interest.

VAT is a tax you collect for HMRC, so mistakes can quickly turn into a bill you have to fund from your own profit. This guide covers the VAT mistakes we see most often among small businesses in Bolton and Greater Manchester, how to correct them, and what the penalty and interest rules mean for you in 2026/27.

The 10 most common VAT mistakes

These are the VAT mistakes that cause the most problems for small firms, roughly in the order we come across them.

1. Registering late. You must register if your taxable turnover in the last 12 months goes over £90,000, or if you expect it to go over £90,000 in the next 30 days alone. Many businesses only look at their turnover at the year end and miss the rolling test. Our guide to VAT registration explains both tests.
2. Reclaiming VAT on business entertainment. You cannot reclaim VAT on entertaining or providing hospitality to clients and suppliers, such as meals or sports tickets.
3. Reclaiming all the VAT on a car. You can only reclaim all the VAT on a new car if it is used only for business, and HMRC treats commuting as personal use. Most small business cars do not qualify.
4. Getting fuel wrong. If a vehicle has any private use, you must either pay the fuel scale charge or reclaim only the VAT on business mileage, backed by detailed mileage records.
5. Claiming the full VAT on mixed-use costs. Where a phone, broadband or other cost is partly personal, only the business proportion of the VAT can be reclaimed.
6. Reclaiming without a valid VAT invoice. A card receipt or a supplier’s statement is not enough. You need a valid VAT invoice showing the supplier’s VAT number.
7. Charging the wrong rate. Treating standard-rated supplies as zero-rated or exempt, or the other way round, is common in food, construction and online selling.
8. Missing pre-registration VAT. You can reclaim VAT on goods bought up to 4 years before registration that you still have, and on services bought up to 6 months before, provided they relate to your business.
9. Using the wrong tax point. Putting a sale or purchase in the wrong VAT period is a timing error that still has to be corrected.
10. Filing or paying late. Late VAT returns and payments now trigger penalties automatically, even for nil returns.

If you use the VAT Flat Rate Scheme, watch out for a different set of VAT mistakes, such as using the wrong sector percentage or applying the scheme after your turnover has outgrown it.

How to correct VAT mistakes on past returns

How you fix VAT mistakes depends on the net value of all the errors you have found and whether any were deliberate. HMRC sets out two methods in VAT Notice 700/45.

Situation	How to correct it
Net errors of £10,000 or less	Method 1: adjust your next VAT return
Net errors between £10,000 and £50,000, and no more than 1% of box 6 for the current return	Method 1: adjust your next VAT return
Net errors between £10,000 and £50,000 and over 1% of box 6	Method 2: tell HMRC separately
Net errors over £50,000	Method 2: tell HMRC separately
Any deliberate error	Method 2: always tell HMRC separately

Box 6 is the total value of your sales, excluding VAT, for the return period in which you discover the errors. You can choose Method 2 for an error of any size if you prefer.

Reporting errors to HMRC under Method 2

Form VAT652 can no longer be used to correct VAT returns. Instead, you report errors through HMRC’s online error notification service or in writing. You will need to explain how each error happened, the VAT periods affected, whether it relates to input or output tax, the amounts involved and how you worked them out.

Time limits

You can generally correct errors going back 4 years. This time limit does not apply to deliberate errors. HMRC can also look back further than 4 years in some cases, as our guide on how far back HMRC can investigate explains.

Worked example: two Bolton businesses with the same error

Here is how the thresholds work for VAT mistakes in practice. Two VAT-registered businesses each find they under-declared £12,000 of output VAT over the last year.

	Farnworth wholesaler	Horwich café
Net error found	£12,000	£12,000
Box 6 sales in current return	£1,500,000	£60,000
1% of box 6	£15,000	£600
Can it go on the next return?	Yes, £12,000 is below £15,000	No, it exceeds both £10,000 and 1% of box 6
Method	Method 1	Method 2

The wholesaler adds £12,000 to box 1 of its next return. The café must notify HMRC separately. In both cases interest is likely to be charged on the VAT paid late, and HMRC can charge a penalty if the error was careless.

Penalties for VAT mistakes

Inaccuracy penalties

If an error came from carelessness, HMRC can charge a penalty of up to 30% of the extra VAT due. Telling HMRC before it finds the error yourself (an unprompted disclosure) keeps the penalty lower.

Behaviour	Unprompted disclosure	Prompted disclosure
Took reasonable care	No penalty	No penalty
Careless	0% to 30%	15% to 30%
Deliberate	20% to 70%	35% to 70%
Deliberate and concealed	30% to 100%	50% to 100%

Late submission: penalty points

Each late VAT return earns one penalty point. When you reach the threshold, you are charged a £200 penalty, and a further £200 for every late return while you stay at the threshold.

Filing frequency	Points threshold
Annual	2
Quarterly	4
Monthly	5

Late payment penalties and interest

If you pay late, there is no penalty for the first 15 days. After that:

• Days 16 to 30: a first penalty of 3% of the VAT still unpaid at day 15.
• Day 31 onwards: a further 3% of the VAT still unpaid at day 30, so up to 6% in total.
• From day 31: a second penalty charged daily at 10% a year on the outstanding balance until it is paid.

Late payment interest runs from the day after the due date until you pay, at the Bank of England base rate plus 4%. The rate has been 7.75% since 9 January 2026.

For example, a Bolton builder who pays a £8,000 VAT bill 40 days late would face first penalties of £240 and £240, a second penalty of about £22 and interest of around £68, so roughly £570 in total. Agreeing a Time to Pay arrangement before the bill is overdue can stop the penalties building up. See our update on VAT late payment penalties for more.

How to avoid VAT mistakes

Most VAT mistakes come from weak processes rather than complex rules. A few simple habits prevent the majority of them.

• Check your rolling 12-month turnover every month against the £90,000 threshold.
• Keep every purchase invoice and check it is a valid VAT invoice before you reclaim.
• Flag entertainment, vehicle and mixed-use costs in your bookkeeping so they are treated correctly.
• Use Making Tax Digital compatible software and reconcile your VAT account to your bank each quarter.
• Diarise filing and payment deadlines, and set up a Direct Debit.
• Get a second pair of eyes on returns where the figures look unusual.

Our cloud accounting specialists can set your software up so most of these checks happen automatically and catch VAT mistakes before a return is filed.

Frequently asked questions

Get help with VAT

VAT mistakes are far cheaper to prevent than to fix. Cangaf’s ACCA-qualified team prepares and files VAT returns for businesses across Bolton and Greater Manchester, reviews past returns for errors and handles disclosures to HMRC on your behalf. Request a fixed-fee quote today.

Official guidance: How to correct VAT errors and make adjustments or claims (VAT Notice 700/45), How late payment penalties work if you pay VAT late, Penalty points and penalties if you submit your VAT Return late and Reclaim VAT on business expenses.

Related guides: Persons With Significant Control: PSC Register and ID Verification Guide (2026) · What is a Benefit in Kind · Deadline for VAT Payments