VAT - To Claim or Not to Claim
Very few traders have enough time on their hands to acquire an indepth knowledge of our particularly complex VAT system and, as a result, honest mistakes can often be made that are not picked up until the dreaded VAT inspection.
With this in mind, we've produced this brief guide to the recovery of costs incurred on your VAT to help make sure you don't get caught out by the VAT man:
Non-deductible VAT
The basic rule is that VAT on purchases or expenses can only be claimed where it is incurred for business purposes by a VAT registered trader, making vatable sales. It cannot be claimed where goods or services are bought for wholly private purposes and if they are only partly for private purposes, then that proportion is irrecoverable.
As well as this, there are other areas where VAT incurred on costs is always irrecoverable. The two main examples are:
- Goods or services used for the purposes of business entertaining.
- Motor cars (with exceptions such as car dealers or where the car is used wholly and exclusively for business, such as taxis). However, this restriction only applies to cars - the VAT incurred on commercial vehicles, such as vans, can be claimed in full. In the case of leased cars, 50% of the VAT charged on the payments is recoverable.
Administering claims to recover VAT
There are several administrative pitfalls that can catch you out when it comes to claiming VAT on costs when preparing a VAT return.
Firstly, you have to have a valid VAT invoice (or similar secure evidence) that clearly shows (amongst other things):
- the name of the supplier
- the goods purchased and date of supply
- the VAT charged
- that the supplier is VAT registered
Care should be given to make sure that the invoices are always addressed to the correct person although, by concession, the VAT man will usually allow VAT to be claimed on items reimbursed to staff.
Some suppliers will initially issue proforma invoices that require up-front payment. It is important to note that these are not VAT invoices and do not give a trader the right to recover VAT - only when you are issued with a replacement VAT invoice are you entitled to claim the VAT incurred.
If a trader has not paid an invoice in full and the invoice is over six months old, then the VAT (or a proportion of it where the invoice has only been part paid) must be repaid to Customs. Of course, if the debt is subsequently paid, the VAT can once again be recovered. This is in line with the rules for bad debt relief whereby a trader can recover VAT paid to Customs on bad debts over six months old.
This summary highlights areas that can catch out even the most diligent trader but is not intended to give an exhaustive guide on VAT recovery. If you would like to discuss any particular issues or simply learn more about VAT recovery then please contact Charles Green on 020 8652 2450.
If you would like to discuss any particular issues or simply learn more about VAT recovery then please contact Charles Green on 020 8652 2450.
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