Quick blog this week, but about a very important issue that affects anybody submitting a VAT return and the humble document otherwise known as the VAT invoice.
We all know that HMRC is constantly looking for ways to increase the VAT revenue. Even if you think you do everything correctly, VAT officers are very good at weeding out errors, even at the most organised business. Usually it’s something relatively minor; e.g. VAT on petrol; business entertainment, the usual stuff.
Claiming VAT incorrectly?
But nowadays, the officers are being even more observant about the concept of businesses claiming VAT incorrectly. What do I mean by this? Well I’m not talking about fraudulent invoices or VAT avoidance schemes; I’m talking about the most basic of documentation; the VAT invoice.
Every time you or I or any business owner issues a VAT invoice, we/they are issuing a legal document. And there are 2 particularly important aspects to this:
- the VAT invoice itself MUST be correct; and
- any VAT charged MUST by correctly charged.
If either of those criteria are incorrect, then the recipient is not entitled to claim the VAT.
Making sure the invoice is correct
The content of VAT invoices is set out in detail in the VAT legislation. HMRC must ensure that these documents are correct; otherwise, they aren’t VAT invoices. The information is set out in the VAT Guide, Notice 700; s16 http://tinyurl.com/y8wo8ufe.
On the other hand, if you charge VAT to a customer and the document isn’t a correct VAT invoice, as the “supplier”, you are legally required to pay the VAT to HMRC even if the customer can’t claim it. Definitely a case of “heads they win, tails you lose”.
If you’re stuck on management charges or intra-group transactions then check out my latest e-book “VAT on inter-company transactions and management charges”
And the VAT is correctly charged….
It’s about whether you have been charged VAT correctly. If the wrong VAT rate is shown on an invoice, then the invoice is incorrect and the VAT has been incorrectly charged. This applies to all businesses, whether you’re a manufacturer and only make taxable supplies of goods; a website designer, a retailer; or you’re a partly exempt property developer; it’s the same principle. If you have been charged too much VAT, or where the supply was zero-rated or exempt, then the VAT has been incorrectly charged and you can’t claim it.
The ONLY way you can recover VAT incorrectly charged is to ask the supplier to issue a credit note and re-issue the invoice with the correct amount of VAT.
One of the most common areas for errors is transactions with associated businesses; e.g. if Company A charges VAT on disbursements recharged to Company B.
Or what if you’re a property developer and your contractor charges 20% VAT for work that qualified for the 5% or zero-rate?
Either way, whatever the value, the payer can’t claim the VAT on its VAT return. If it does, then its VAT return is an error return.
The VAT invoice is a legal document and the cornerstone of the VAT system, particularly for B2B transactions.
Take a minute to check your suppliers’ invoices so you don’t submit error returns and have to sort out the problem after the event. If you’re in any doubt, remember that you can claim underclaimed VAT on a later VAT return. If the invoice is wrong, make sure the supplier sorts things out for you. Better to claim the VAT 3 months late than to submit incorrect VAT returns.