1. Inaccurate or Incomplete Record Keeping
One of the most frequent issues HMRC finds is poor record keeping. UK tax law requires businesses to maintain accurate and complete financial records, including:
- Sales and purchase invoices
- Bank statements
- Payroll records
- Expense receipts
- Contracts and agreements
Why This Matters
Incomplete or inaccurate records make it difficult to verify the income and expenses declared on tax returns. If records are missing or inconsistent, HMRC may raise queries or assume that income or transactions were not declared correctly.
Common Problems Include
- Lost or missing invoices: Failure to retain all invoices can raise red flags.
- Mixing personal and business finances: Using the same bank account for personal and business transactions complicates the audit trail.
- Unclear or informal bookkeeping: Handwritten notes or poorly maintained spreadsheets can appear unreliable.
- Non-compliance with Making Tax Digital (MTD): Digital record-keeping and reporting are required for VAT-registered businesses above the VAT threshold.
How to Avoid This Mistake
- Use a reputable accounting software that complies with HMRC requirements.
- Keep digital and physical copies of all financial documents.
- Separate business and personal bank accounts.
- Regularly reconcile accounts to detect discrepancies early.
- Engage a qualified accountant to review your books annually.
2. Incorrect VAT Treatment
VAT (Value Added Tax) is a complex area of taxation, and mistakes here are common during investigations. Businesses may either over-claim or under-report VAT, both of which attract scrutiny.
Common VAT Errors
- Charging VAT on exempt or zero-rated goods incorrectly.
- Failing to register for VAT when turnover exceeds the threshold.
- Incorrectly claiming VAT input tax on non-business or personal purchases.
- Inaccurate VAT returns or delayed submission and payment.
Consequences of VAT Mistakes
VAT errors can lead to penalties, repayment demands, and interest charges. Persistent or large-scale errors may also trigger full-scale investigations.
Best Practices
- Understand which goods and services attract VAT and at what rates.
- Ensure you register for VAT promptly when required.
- Keep detailed VAT invoices and receipts.
- Use accounting software that automates VAT calculations and reporting.
- If unsure, consult a VAT specialist before submitting returns.
3. Under-Declaring Income or Sales
One of the gravest mistakes a business can make—whether deliberately or inadvertently—is failing to declare all sources of income.
Where Under-Declaration Happens
- Cash sales not recorded properly.
- Online sales via third-party platforms not reported.
- Income from overseas customers not declared.
- Barter transactions or in-kind income overlooked.
Why Under-Declaration is Risky
HMRC has become adept at cross-checking data from banks, suppliers, customers, and third parties. Mismatches in declared income and actual receipts are often the first trigger for investigations.
How to Prevent Under-Declaration
- Record every transaction promptly and accurately.
- Reconcile sales reports from online platforms with your accounts.
- Disclose all sources of income, including overseas revenue.
- Be transparent about all financial inflows during HMRC enquiries.
4. Incorrect Expense Claims
Claiming business expenses properly is a legal way to reduce taxable profits, but claiming incorrect expenses can cause major issues.
Common Expense Errors
- Claiming personal expenses as business costs.
- Inflating expenses or rounding up costs.
- Failing to keep valid receipts or documentation.
- Vague expense descriptions that don’t match the purchase.