VAT is a very different tax to the direct taxes known by most people. You cannot look for some form of logic - you have to learn its rules and avoid the tripwires, including the VAT myths that have come about.

A business’s ordinary financial records will be sufficient for VAT purposes

There has always been an assumption that because businesses have to keep financial records, it is a relatively simple task to deal with VAT accounting. It is not true. A prime example is income recognition. For financial accounting purposes, income is recognised when it accrues or is earned. However, there are special rules for VAT, which can mean you are due to pay VAT to HM Revenue & Customs (HMRC) even before you have become entitled to the consideration payment agreed with your customer.

If you tell HMRC that you cannot pay, there is no penalty

There are penalties for late payments. A taxpayer is allowed one ‘default’ before he becomes liable for the penalty for non-payment, called the default surcharge. The amount of the penalty depends on the number of defaults, and can rise to 15 per cent of the VAT due. In general terms, the only way that a person can avoid a penalty is to show that there is a ‘reasonable excuse’ for non-payment.

VAT is only due when the business issues an invoice for the work done

VAT liability can be triggered by any of the following events, depending on the nature of what is supplied:

• Delivery of goods or services

• Payment for a future delivery of goods or services

• The issue of a VAT invoice if this precedes the date when the supply of goods or services is made.

I have two separate businesses that are both below the VAT registration threshold, so I do not have to register for VAT

It is a myth that a business is registered, although there are references to it in HMRC material. Strictly, it is the person who carries out a business that has to be registered. That may be simple if the person is a company, but in deciding whether or not an individual has to be registered, it does not matter whether he has two separate and distinct businesses - he has to add the taxable turnover of each business to determine whether he has to register.

My business operates at a loss, so I do not have to pay any VAT

It seems hard that a person who makes a loss operating their business should still have to pay VAT, but VAT is due on the consumption of goods and services - the actual accounting or income tax results achieved by the business are irrelevant.

There is no VAT on inter-company transactions within a group or on transactions between a partner or proprietor and their business

Many businesses comprise a number of legally separate entities. However, they may all be controlled by the same person and operated as if they were a single business. It is not uncommon for transactions between such related persons to be overlooked from a VAT perspective.

However, it is a myth that such transactions do not bear VAT or are subject to different rules.

My customer is based in another country so I do not need to charge them VAT

A regular myth is that if the addressee on the invoice is outside the UK, VAT does not apply. But it is not as easy as that - at a minimum, the supply will be zero rated, so strictly within VAT. If goods are exported, if they are sent from the UK, they will be zero rated.

John Whiting is chair of the Chartered Institute of Taxation’s Management of Taxes subcommittee and a tax partner with PricewaterhouseCoopers LLP.

Maric Glaser is a technical officer with the Chartered Institute of Taxation, and he works for the VAT and Indirect Taxes subcommittee.