We are often asked by our clients if we can review whether their procedures and processes for VAT recovery are working correctly and efficiently. Most clients are looking to recover extra VAT but very often we find that mistakes and errors have crept into the VAT recovery process.
Often it is the same errors that keep repeating themselves and many of these are quite basic. Frequently, they could easily have been avoided and they can often be costly if a business needs to repay VAT.
We thought it may be helpful if we detail some of the most common mistakes:
1.Lack of VAT invoices or other evidence – this one seems so obvious, it almost seems unnecessary to include, but it is the most common reason why VAT claims are disallowed. Simply put if you don’t have a VAT invoice you can’t claim back the VAT. Shipping notes, emails, delivery documents, purchase orders and proforma invoices are not VAT invoices and do not give a business the right to recover VAT. Under the VAT rules, a supplier must issue a proper VAT invoice if it charges VAT.
The tax authorities have the discretion to allow a business to provide alternative evidence to recover VAT. The level of alternative evidence is high and to avoid having to provide this, the business should chase up missing invoices prior to submitting their VAT return.
2.Invoices not Paid after More than 6 Months – A VAT inspector will often ask for an aged creditor list. The reason is that if a business has recovered VAT but hasn’t paid the invoice, it is required to repay any input VAT claimed where the invoice is more than six months overdue for payment. This rule is automatic and does not depend on the supplier informing the customer that it will be claiming bad debt relief.
3.Claiming VAT twice – where a supplier issues a payment request and then issues a VAT invoice, sometimes a customer will process both documents thereby recovering double the amount of VAT. Clearly this is incorrect.
4.VAT on Business Entertainment – VAT is not recoverable on business entertainment. There may be scope to recover VAT on the cost of basic refreshments provided to overseas customers/clients, but the rules are quite restrictive. To add to the confusion, where VAT is incurred on staff costs e.g., the office Christmas party the VAT is recoverable (subject to the normal rules).
5.Import VAT – When businesses import goods into the UK, if the freight agent/carrier requests a business to pay import VAT, this can only be recovered if the business has the correct document. In the UK this document is called a “Monthly Import VAT Certificate” or “C79 certificate”’, which is issued by HM Revenue & Customs (“HMRC”).
VAT is not recoverable with the invoice issued by the freight agent/carrier as this merely represents the amounts paid by the freight agent/carrier on behalf of the business. Since the start of 2021 in the UK, in most cases it should not be necessary for VAT registered businesses to pay import VAT at the point goods are entered into the UK as under the postponed VAT accounting rules, import VAT can be recorded on a VAT registered business’s VAT return. This will assist importers of goods as they will not have the cash flow cost of paying import VAT and then waiting to recover the VAT on their VAT returns.
Contact us to learn more about VAT.