Posted: Thu 1st Jul 2021
Tax mistakes can happen, no matter the size of your company or how long you’ve been running. While colleagues, customers or clients may not feel upset by the occasional tax mistake, HMRC tends to be far less forgiving.
Each year, companies fall for a multitude of common tax mistakes from missing a deadline, claiming tax relief incorrectly or miscalculating tax owed. Some errors may only result in a slap on the wrist and a small fine, but others can cause the taxman to take serious legal action.
To help you avoid unwanted attention for HMRC, here are five common mistakes you can easily steer clear of:
Falling behind on your VAT deadline schedule
It’s easy for VAT registered company directors to miss their VAT deadline. Although VAT deadlines are regular, they can be difficult for some to keep track of. Depending on what VAT scheme you use for your business, your VAT deadline will be different.
For those who are required to complete their VAT monthly or quarterly, the deadline for submitting your VAT return and paying for any VAT owed is one calendar month and seven days after the end of your VAT period. For example, for the quarter ending 31 March, your return must be submitted, and payment cleared in HMRC’s account by 7 May.
If you are on the VAT annual accounting scheme, you will only need to submit a VAT return once a year. This is due two months after the end of your accounting period. However, you need to bear in mind that you need to make monthly or quarterly VAT payments throughout the year and any difference is settled once you submit your VAT return.
If you miss your VAT deadline, not only can you face fines, but you may also receive a surcharge liability notice depending on your VAT payment history. For first-time offenders, HMRC may allow you not to accrue surcharges.
Upon a second VAT default, companies that turnover £150,000 or more will be sent a surcharge liability notice. This letter tells you that you have been placed in what is known as a ‘surcharge period’ which you will stay in for the next 12 months. If you miss another deadline within those 12 months, you may begin to accrue fines depending on your company’s turnover.
This could also lead to the surcharge period being extended another 12 months. If you continue to pay your VAT late you are likely to see an increase in penalty charges as HMRC grow more and more tired with your failure to keep on top of your tax obligations.
Failing to tell HMRC about a tax mistake you’ve noticed
Making mistakes is normal, but you can make it worse by not notifying HMRC when you’ve realised it’s happened. It isn’t just about making sure you complete your tax return on time, or pay your tax in time, but it’s crucial to ensure you have declared the correct amount of tax owed.
If you make a mistake on your company tax return for example and don’t tell HMRC, you could face a significant bill for taxes owed.
HMRC has created a system on how penalties will be issued depending on whether you are considered to have been careless or have purposefully tried to conceal the tax mistake. The penalty will be based on the amount of tax owed and payable in addition to the original sum owed.
Not only will you have to pay your penalty, but for serious mistakes, your business could also be subject to stricter reporting requirements as part of its future tax dealings with HMRC.
Using the wrong employment status for staff
One mistake that can be easily made is when your company uses freelancers or contractors. Many businesses depend on freelancers to meet their targets and deal with demand throughout the year; however, it is crucial to determine whether they are a genuine freelancer or disguised employees.
A disguised employee is someone who claims their employment status is a freelancer so that they do not have to pay employee income tax and National Insurance contributions.
However, they do not truly work for themselves and you are essentially their employer so should also be paying for employer’s National Insurance. If you are unsure, you can use HMRC’s website to help you check by answering a few questions.
If you make the mistake of using the wrong employment for staff you may have to repay tax and National Insurance, any interest HMRC deems necessary, and penalties for this mistake. HMRC can go six years back if they find that someone has been employed wrongly.
Claiming non-business-related travel expenses
Over the last few years, HMRC has increasingly penalised several company directors for claiming travel expenses that haven’t been for business purposes.
While travel expenses are an allowable expense that can be deducted from company profits to reduce corporation tax, they must be wholly and exclusively be for the purpose of the business.
Therefore, you cannot claim travel where you've travelled:
for personal reasons, such as going to the doctors between business meetings
for combined personal and work reasons such as going to the supermarket on the way home
between your home and your usual place of work (usual commuting to work is not seen as business travel)
Claiming non-business-related travel expenses will be treated in the same way as failing to notify HMRC of a tax mistake because you have incorrectly calculated your tax and overclaimed on expenses.
If you continually do this, HMRC will see this as attempts to intentionally commit tax evasion and can seek legal recourse against you in addition to issuing any penalties.
Delivering poor records to your accountant
Most small businesses will use an accountant when it comes to managing their tax and accounting obligations. However, even where these responsibilities have been delegated to someone external, you can still be held liable for any mistakes made.
This will be the case where the accountant has incorrectly submitted a tax return for your company (whether it’s a VAT return, corporation tax return or anything else) and has relied solely on the information that you have provided.
If you have been negligible in providing all necessary documents and records, then you will be liable for paying any penalties.