A Common VAT Mistake That Can Cost You Dear

VAT is one of the most common areas where businesses go wrong, especially when they submit their own VAT returns. We recently reviewed a client’s VAT return and spotted a mistake that we see far too often — and it can easily lead to HMRC penalties if left unchecked.

The mistake: reclaiming VAT incorrectly

The client had paid an invoice for £1,200, which already included VAT. When completing the VAT return, they simply calculated 20% of £1,200 and reclaimed that amount as VAT.

At first glance, this feels logical. Unfortunately, it’s wrong.

If you reclaim VAT this way, you end up overclaiming, which HMRC will eventually spot.

Why this happens

When VAT is included in a price, the VAT is not 20% of the total — it is 20% of the net amount. The total figure already includes VAT, so you need to extract it correctly.

The correct way to calculate VAT included in a total

Always start by checking that you have a valid VAT receipt showing VAT has been charged.

If the total amount paid is £1,200 including VAT at 20%, the VAT element is calculated as:

£1,200 ÷ 6
or
£1,200 ÷ 120 × 20

This gives you the actual VAT included, not an inflated figure.

Using this method ensures your VAT reclaim is accurate and compliant with HMRC rules.

Why this matters

Overclaiming VAT may seem like a small error, but it can lead to:

• HMRC queries and inspections
• Repayment of VAT incorrectly claimed
• Interest and potential penalties
• Unnecessary stress and wasted time

HMRC does not accept “I didn’t know” as a defence.

Final thought

If you’re doing your own VAT returns, it’s worth having them reviewed — even if it’s just for peace of mind. Small calculation errors can add up quickly over time.

If you’re unsure whether your VAT is being calculated correctly, it’s far better to check now than fix problems later.