Operating a UK limited company comes with a variety of tax obligations and compliance requirements. While limited companies enjoy certain tax advantages and protections, navigating the complex tax system can be challenging. Many companies inadvertently make mistakes that lead to financial penalties, interest charges, or missed opportunities for tax relief.
This guide explores the most common taxation mistakes UK limited companies make, why they happen, and how to avoid them. Understanding these pitfalls is crucial for directors, accountants, and business owners to maintain compliance and optimise their tax position.
1. Incorrect VAT Registration and Filing
VAT Registration Thresholds and Timing
One of the earliest mistakes a growing limited company may make is failing to register for VAT when required. In the UK, if your taxable turnover exceeds the VAT registration threshold (currently £85,000 over a rolling 12-month period), you must register for VAT with HM Revenue & Customs (HMRC).
Mistake: Many companies either delay registration, unaware of the threshold, or fail to monitor turnover effectively, leading to late registration.
Consequence: Late registration can result in HMRC charging VAT on sales made before registration and penalties for non-compliance.
Errors in VAT Returns
Filing VAT returns incorrectly is another frequent issue. Common errors include:
- Charging the wrong VAT rate (standard 20%, reduced 5%, or zero-rated supplies).
- Incorrectly claiming input VAT on purchases that are not allowable.
- Failing to separate business and personal expenses when reclaiming VAT.
- Filing VAT returns late or not submitting them at all.
How to Avoid These Mistakes:
- Regularly monitor turnover to identify when VAT registration is required.
- Keep detailed records of all sales and purchases with clear VAT amounts.
- Use accounting software tailored for VAT compliance.
- Submit VAT returns on time and double-check calculations or seek professional help.
2. Not Claiming All Allowable Business Expenses
Understanding What Counts as an Allowable Expense
Many limited companies do not maximise their tax deductions because they fail to claim all legitimate business expenses. Only allowable expenses, defined by HMRC as costs incurred “wholly and exclusively” for the business, can reduce taxable profits.
Commonly Missed Expenses:
- Travel expenses (fuel, train fares, parking fees)
- Office costs (rent, utilities, phone bills)
- Equipment and software costs
- Professional fees (accountants, legal services)
- Training costs related to the business
- Marketing and advertising
Mistakes to Avoid:
- Claiming personal expenses as business costs, which is illegal.
- Forgetting to claim allowable expenses because of poor record keeping.
- Not including small but deductible costs (e.g., business subscriptions, stationery).
Practical Advice:
- Maintain separate bank accounts for business and personal spending.
- Keep all receipts and invoices for expenses.
- Use accounting software to track expenses accurately.
- Consult HMRC guidance or a tax advisor to clarify allowable expenses.
3. Errors in Corporation Tax Returns
Corporation Tax Basics
UK limited companies pay Corporation Tax on their profits. The current Corporation Tax rate varies depending on profit levels and government policy but is generally around 19%-25%. Companies must file a Company Tax Return (CT600) annually, detailing taxable profits and tax owed.
Common Mistakes:
- Incorrectly calculating taxable profits, either by overstating expenses or missing income.
- Failing to report all sources of income, such as investment income or overseas earnings.
- Misapplying tax reliefs or allowances, like capital allowances on fixed assets.
- Late filing or failure to file altogether.
Consequences:
- Underreporting profits can lead to HMRC investigations and penalties.
- Late filing incurs daily penalties, increasing over time.
- Incorrect returns might trigger audits and interest on unpaid tax.
How to Prevent:
- Keep thorough and accurate accounting records year-round.
- Use professional accountants or reliable accounting software.
- File returns well before the deadline (usually 12 months after the company’s accounting period ends).
- Understand what income and expenses should be reported.