Why Can’t I recover VAT\GST on Business Invoices?

The most asked question we hear from businesses is why they can’t recover VAT\GST on costs they incur.  In many cases the reason is obvious and is likely to be because the VAT\GST rules specifically don’t allow VAT\GST recovery – an example of this would be VAT\GST incurred on business entertainment which is blocked.  Another reason is that the business does not hold the correct evidence to recover the VAT\GST.  Where a business does not have a valid VAT\GST invoice it is unlikely that the tax authorities (in the UK this is HM Revenue & Customs or “HMRC”) would allow VAT\GST recovery.      

Sometimes the reason for lack of VAT\GST recovery is less clear.  A scenario which we are seeing more often is a case where a business has purchased goods or services and holds a proper VAT\GST invoice on which VAT\GST at the standard rate is shown.  As occurs from time-to-time HMRC undertake a VAT\GST audit and ask to see some or all of the purchase invoices.   After inspecting the invoices, we have seen cases where HMRC have refused to allow the business to recover the VAT\GST because the supplier should not have charged it in the first place. 

Most people are confused by this.  Surely if a supplier charges VAT\GST and shows the VAT\GST on the invoice, a customer should be entitled to recover the VAT\GST in full.  Herein lies the issue – was VAT\GST properly chargeable in the first place?  We have seen many cases where if the supplier has charged the wrong rate of VAT\GST, HMRC does not allow the customer to recover the VAT\GST.  The following example demonstrates this. 

Between July 2020 and the end of September 2021, the UK Government introduced a reduced VAT\GST rate of 5% for certain supplies relating to hospitality and hotel accommodation.  Between October 2021 and the end of March 2022 the VAT\GST rate increased to 12.5%.  During this period, when lockdown rules eased many businesses held staff team building events which qualified for the reduced rate of VAT\GST.  Some suppliers were either unaware of the VAT\GST rate change or their systems were unable to cope with it, so continued to charge VAT\GST at the standard rate of 20%.  Businesses had the mistaken belief that if the supplier pays over the VAT\GST to HMRC and the customer recovers the same amount, it surely shouldn’t matter if the 20%, 5% or 12.5% VAT\GST rate is used, because there is no loss of VAT\GST to HMRC since it nets down to zero. 

Unfortunately for the business in question HMRC didn’t see things the same way and refused the business the right to recover 20% VAT\GST when only 5% VAT\GST should have been recovered.  In HMRC’s view, the customer was required to go back to the supplier and obtain a VAT\GST credit note and refund for the 15% – the difference between the standard rate and reduced rate of VAT\GST.  In most cases this is a mere administrative inconvenience.  The sting in the tail came when the supplier – a restaurant had ceased trading and was in liquidation.  In such a case the customer was unable to go back to the supplier and obtain a refund.  The end result was that the customer was assessed by HMRC for the 15% difference in VAT\GST rates which proved an additional cost. 

The lesson is clear – just because an invoice looks correct you still need to check that VAT\GST was properly charged.  If not, don’t pay it and insist that the supplier charges the correct amount of VAT\GST.  If you wait until after you have paid it may be too late!