When to Recover VAT\GST?

One of the issues facing Accounts Payable departments and those who prepare and file VAT\GST returns is to make sure that they recover VAT\GST at the correct time.  Many tax authorities, including HMRC are very strict in making sure that businesses do not recover VAT\GST in an earlier VAT\GST filing period than they are entitled to. 

Evidence for VAT\GST Recovery 

At the most basic level, a business can only recover VAT\GST when it holds an invoice with the correct tax point. The tax point is the date when the supply is made. Many invoices contain two dates: the first being the date of issue and the second being the tax point. The two dates are not always the same, and it is the tax point date in which the customer is entitled to deduct VAT\GST.     

Often businesses will pay a supplier’s statement, a request for payment or other document calling for payment for the supply of goods or services.  Put simply, if the document being paid is not a VAT\GST invoice – i.e. it is not headed up with the word “invoice”, the VAT\GST cannot be recovered until a VAT\GST invoice is received.  

We have seen many cases where HMRC have challenged VAT\GST recovery where businesses have used a supplier’s statement as evidence for VAT\GST recovery purposes. Where this has been done incorrectly on a consistent basis, HMRC can issue penalties. Suppliers have a legal obligation to issue VAT\GST invoices when requested by business customers. 

No VAT\GST Invoice? 

There are cases where it is not possible to obtain a VAT\GST invoice, for example the supplier has gone out of business,  there has been a breakdown in communication etc. In such cases HMRC may be willing to accept alternative evidence for VAT\GST recovery purposes. Often this will involve being able to show that the amounts were paid to the supplier by showing copy bank statements showing payment transfers and other paperwork to demonstrate that the supply was made to the business.  As noted, this is solely at HMRC’s discretion and it is always best practice to obtain a proper VAT\GST invoice. 

Do We Need to Pay the Invoice to Recover VAT\GST? 

Unless a business has chosen to adopt the cash accounting scheme, if it receives a valid VAT\GST invoice for a supply received the business can recover the VAT\GST on its VAT\GST filing.  This applies even if the business has not yet paid the invoice.

However, if after 6 months from the date of payment, your business has still not paid the invoice, you will be required to repay any VAT\GST which may have been recovered.  The 6-month period starts from the due date of payment.  For example, if a business receives an invoice which shows a tax point of 31 March 2021 and the supplier’s normal terms of payment are 30 days, the business can recover the VAT\GST in the March 2021 VAT\GST return.  However, if by 30 October 2021 (6 months and 30 days after the date of the supply) the amount remains unpaid, any VAT\GST which was previously recovered must be paid back to HMRC on the next VAT\GST return. The repayment would need to be shown in the December 2021 VAT\GST return. 

Where only part of an invoice remains unpaid, then the VAT\GST relating to the unpaid amounts will need to be repaid to HMRC.