In theory VAT should be fairly straightforward, but in reality it frequently causes confusion over who needs to be registered and what can be claimed. Quite simply VAT is a tax that is charged by VAT-registered businesses on most goods and services. Generally speaking, when a VAT-registered business is charged VAT when it buys goods or services, it can reclaim the VAT. Basically, these businesses are acting like tax collectors - charging VAT, collecting the money and, minus VAT they've incurred, handing it over to HMRC.

Businesses have to register for VAT when their taxable turnover for any 12-month period exceeds the VAT registration threshold, which is currently £77,000. However, if the business will only go over the threshold temprarily an exception can be requested from HMRC.

Also, if a business takes over another business that is already VAT registered then it will be required to register. This is based on the assumption that the joint income of the businesses will be over the threshold.

While these are the main reasons for compulsory registration, there are others. For example, if you think your business’ turnover will exceed the threshold within just 30 days or if you are trading outside of the UK.

NOTE: There are late registration penalties and/or failure to notify penalties along with surcharges and interest for late payment.

So Vince Cable, the Business Secretary no less, has been fined £500 for not registering for VAT on his freelance income which, according to The Sun, was between £127,000 - £192,000 in 2009 -2010. So, the man known for campaigning against tax evasion has himself now been found to have evaded tax, although Mr Cable's aides have said it was not done intentionally and was reported by his personal accountants as soon as it was found.

When asked by The Sun, Mr Cable’s accountants’ Myrus Smith said, “When it became clear that Mr Cable's earnings had breached the level at which VAT was payable, an offer to settle immediately and in full was made to HMRC and this was duly accepted.”

While many sole traders may think they are saving money by carrying out their own bookkeeping, research carried out by Unbiased.co.uk has shown over half might actually be missing out on tax savings because they are not using professional accountants for their bookkeeping. Of those surveyed, just over half admitted to doing their own accounts and a fifth of micro-businesses (which consist of 1-9 employees) were also taking a DIY approach to bookkeeping. Clearly it is a risky route to take, especially with the HMRC crackdown on poor small business accounting, which could land business owners with a hefty fine.