Given the complexity of VAT legislation it is not surprising that most businesses make the odd error or two in their VAT accounting from time to time. In today’s Blog I’m looking at the ten most common areas where errors are made on VAT returns.
Most of these areas are not normally core business operations, which can mean the question of where to put something on a VAT return is unfamiliar, so mistakes can easily be made. Whilst the areas covered in this Blog may not be of high focus in your business, the cost of getting the VAT wrong may well be high.
1) Non-standard supplies
When there is a one-off transaction, it is easy for the correct VAT treatment on income to be overlooked or misapplied. Examples include property letting, recharges to third parties, barter transactions, supplies made to staff and inter-company management charges.
2) Services from abroad
It is common for a business to receive services from outside the UK, however most invoices coming from companies outside the UK will not show UK VAT, which is correct. However, the recipient’s UK VAT return does need to account for the VAT on the service in boxes 1 and 4 of the return, with the net amount being shown in boxes 6 and 7. The amount in box 4 shown as input tax recovery is worked out in the normal way.
3) VAT on imports
Input tax relating to VAT on imports can only be claimed if you have received a C79 certificate issued by HMRC at importation. Businesses must take care not to claim the input tax without a C79.
4) VAT on deposits
A business may sometimes require a deposit from a customer when taking an order. Receipt of the deposit, should it occur prior to the issue of a VAT invoice, creates a tax point and the business needs to ensure that VAT output tax is accounted for in the correct period, even if the deposit is ‘refundable’.
5) VAT on cars
Input tax on purchase of a car cannot be recovered unless the taxpayer can show that the vehicle is “not available” for private use and the burden of proof to establish this is high. For leased motor cars input tax recovery is restricted to 50% on all the lease payments on the same basis. However, for VAT purposes, a vehicle with a payload over a tonne is not classified as a motor car but as a commercial vehicle. This can mean some of the double-cab vehicles are not cars for VAT purposes, with the VAT being reclaimable.
6) VAT on fuel
Input tax can only be recovered on fuel used for business purposes. HMRC can request detailed mileage records and/or fuel receipts to support these claims. Where a business does not keep detailed mileage records it must pay a scale charge as output tax to account for the private use element of the fuel purchased. Whichever method is chosen, it must be applied to all cars in the business, so you can’t use the scale charge on some vehicles and mileage records on others to maximise the recovery of input VAT.
7) VAT on entertainment
All input tax on entertainment, which is not for staff of the business, cannot be claimed, unless you are an exporter entertaining clients from abroad. Most businesses do not realise that taking a client to lunch is not claimable, also there are situations where hospitality provided is argued to be a marketing expense. HMRC is very strict on disallowing input tax on entertainment unless it falls into one of the two exceptions.
8) VAT on non-vatable items
Many businesses assume that there is VAT on all business expenses, such as postal services, which is not the case. Great care should be taken to check the VAT status of such things as tolls, car parking and taxis, and to remember which supplies are zero-rated. VAT on any expenditure incurred in the EU cannot be claimed on the UK VAT return, but a separate EU claim can be made.
9) VAT on bad debts
Most businesses are aware of the bad debt relief rules but many overlook the opposite side of this relief, which requires a business to repay any input tax that has been recovered on purchase invoices that are unpaid six months after the due date. (If an invoice has been part-paid the repayment of input tax is apportioned based on the percentage of the bill paid.)
10) VAT reclaims without supporting invoices
A business needs to have a valid VAT invoice to be able to recover input tax. HMRC can allow the recovery based on alternative evidence, but the level of evidence required is high and HMRC has the discretion not to keep allowing recovery on that basis for future purchases from that same supplier. It is therefore important for a business to ensure all missing VAT invoices are chased up prior to submitting the VAT return for the period.
Tax Accountant’s view
Accountants acting for a business are primarily concerned with balancing and reconciling figures in a client’s records. Unless instructed to do so, most will not undertake a full VAT revue of the year in question. It is therefore imperative that you ask your accountant to undertake a VAT health check for you to ensure that all is well with the VAT records so as to minimise the risk of assessments, penalties and interest being applied by HMRC.