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Recovering VAT: how to avoid the pitfalls

TaxTalk - June 2024

Read time: 20 mins

Service:

Tax

Publication: TaxTalk

What happens when a business considers claiming back VAT incurred on expenditure, via its VAT return to HMRC? Mark Ellis, VAT Partner provides a guide.

The starting point is to determine whether the VAT is partly or wholly attributable to the business’s past, current or future VAT-able supplies.

For this article we’ll assume this is the case. So let’s consider the two key questions that arise:

• Was UK VAT correctly charged at either the 5% or 20% rate?
• If the correct rate was charged, does the business hold appropriate evidence in order to recover some or all of that VAT via VAT returns to HMRC?

Was VAT correctly charged by the supplier?

There are many reasons why VAT is incorrectly charged by suppliers who misunderstand the treatments of their supplies. Examples include:

• Charging 20% VAT instead of 5%
• Charging VAT when the supply was actually subject to: the reverse charge (e.g. certain construction-related services); the zero rate of VAT (e.g. certain food, certain publications); or one of the VAT margin schemes
• The supply fell outside the scope of VAT, eg a transfer of a business as a concern
• The supply was exempt from VAT, eg insurance-related services, finance-related services.

But note, it is an error for a business to try to reclaim via a VAT return some or all of any incorrectly charged VAT. Doing so can render the business liable to:

• interest (currently 7.75% pa) if HMRC initially refunds the VAT and then claw it back later (e.g. following a VAT inspection)
• a ‘careless error’ penalty of up to 30% of the incorrectly reclaimed VAT.

So, where there is any doubt, a business should query what looks like an erroneous VAT charge by a supplier. If the supplier won’t back down, and the business is still in doubt, it should avoid claiming the VAT via a VAT return. Instead, it should file a separate claim to HMRC providing full details.

If HMRC repays the separate VAT claim, the business can take comfort that it accepts the supplier has correctly charged VAT. If HMRC rejects the claim, the business has ammunition to go back to the supplier and seek a refund.

What evidence do you need to reclaim the VAT?

Assuming that VAT has been correctly charged, does the business have the necessary evidence under VAT law to reclaim the VAT?

Any electronic or hard copy document (e.g. a sale contract) can constitute a VAT invoice. The document form isn’t important. The details it contains are what matter. The critical components for a VAT invoice (per VAT case law precedent) are:

• the supplier’s VAT number – check this on HMRC’s free VAT number checker
• a unique invoice reference number
• the invoice issue date
• the amount of VAT charged stated in GBP.

Here are some other issues that may be important:

• If there are several companies in your group with similar names and different VAT registration numbers, check the name of the customer shown on the invoice so that the correct company in your group reclaims the VAT
• If the supplier makes different supplies, some of which may be VAT-exempt or subject to VAT at different rates, make sure there’s an accurate description of the supplies on the invoice. This means HMRC can easily check that those supplies match the VAT treatment applied by the supplier
• Where the business has purchased or rents property, always ask for a copy of the supplier’s ‘option to tax’ written notification to HMRC in respect of the property, before blindly accepting that the seller/landlord has charged VAT correctly.

Is it a VAT invoice or a request for payment?

The last critical issue is where an invoice showing a VAT amount says ‘This is not a VAT invoice’ (or similar). If so, the business must wait to receive a VAT invoice from the supplier before reclaiming any VAT from HMRC. This is because the document is merely a request for payment, rather than a VAT invoice. It may well mean the supplier is not paying the VAT shown on that document to HMRC at that time. 

For further advice on issues raised in this article, please contact Mark Ellis.