Top 10 VAT Investigation Errors

VAT inspections used to be something that happened on a fairly regular basis for VAT-registered business owners. Despite the fact that the number of routine VAT inspections has decreased significantly over the last 5 to 10 years as a result of HMRC’s more targeted and risk-based approach, most businesses still dread the experience.This doesn’t need to be the case, if VAT records are well kept and care is taken to avoid most common errors.

1. VAT on fuel

Many businesses reclaim VAT on fuel purchased for the business but make the mistake of not reflecting the proportion to fuel used exclusively for business purposes. HMRC will expect to see detailed mileage records to support these claims. Where detailed mileage logs are too onerous to maintain, the business must pay scale charges as output tax, to account for the private use element of the fuel purchased.

Car fuel scale charges are easily missed and probably the most frequent error found in a routine VAT inspection. Whichever method of VAT recovery of fuel is selected, the receipts to support VAT recovery are required.

2. VAT on motor cars

HMRC will not allow VAT recovery on the purchase of a car for business use unless it can be demonstrated that the car is used exclusively for business purposes and can only be used for business purposes. Only where the strict conditions surrounding their use can be demonstrated can VAT be reclaimed on a pool car. Another common error is where 100% of the VAT charged on cars leased for business use is recovered as input tax. Input tax recovery on leased cars should be restricted to 50% and must be supported by a VAT invoice.

3. Not charging VAT on non-standard supplies

Businesses are generally adept at correctly charging VAT on their core business supplies. Income, on the other hand, can be overlooked or mistreated when something slightly out of the ordinary, or less regular, occurs. . Examples included inter-company management charges, supplies made to staff, barter transactions (where no money changes hands), property letting, and recharges of costs to third parties.

4. Receipt of reverse charge services

Today’s business activities are frequently global, with UK businesses receiving services from overseas suppliers. In most cases, invoices received from foreign companies will not include a charge for UK VAT. . Subject to limited exceptions, this is correct but UK VAT should instead be accounted for on the value of those supplies by the UK business buying the services, under the reverse charge procedure.

The recipient should declare the VAT that would be due if the service had been purchased from a UK supplier in Box 1 of the VAT return, with the input tax claimed as usual in Box 4. For many businesses, this accounting procedure will have no net impact on their VAT return, but for businesses that are partially exempt, correctly recording receipt of reverse charge services can result in an input tax restriction.

Buying reverse charge services from an overseas supplier will also bring forward the date when a business exceeds the VAT registration threshold, as the value of services purchased is added to the sales the unregistered business makes and counts towards the registration threshold.

5. Recovering VAT on Entertainment

HMRC has always scrutinised business entertainment to ensure that no input tax is claimed in connection with it. Many businesses are offended that taking a client, or potential client, out to lunch is considered business entertaining, and many argue that it is simply a marketing opportunity.However, any form of entertainment remains blocked from input tax recovery and some business owners continue to be caught out.

6. Aged creditors

The bad debt relief rules, which apply to claiming back VAT on an unpaid debt, are well-known to many businesses. The majority, however, overlook the reversal of this rule, which requires businesses to repay input tax to HMRC that has been recovered on invoices received from suppliers but payment to the supplier has not been made after 6 months.

7. Import VAT

Import VAT can only be recovered by businesses following receipt of official documentation from HMRC to evidence the import, known as the C79 certificate. This is normally received approximately 3 weeks after the month end in which the goods were received in the UK. Many businesses make the mistake of reclaiming based on invoices, which is not acceptable for the purpose of claiming import VAT.

8. Failing to account for VAT deposits

Often businesses will take deposits from customers when accepting an order for goods or services, but fail to account for VAT on these payments until the balancing payment has been received. This is incorrect, as receipt of payment, in full or in part, creates a tax point for VAT purposes and VAT is due at the date payment is received, unless an invoice has already been issued.

9. Reclaiming input tax without supporting invoices

A business must keep evidence to support the expenditure in the form of a valid VAT invoice in order to recover VAT on expenses. If no such evidence is retained, HMRC will refuse to recover VAT unless alternative evidence can be persuaded. The level of evidence required in the absence of a VAT invoice is high and to avoid having to provide this, the business should chase up missing invoices prior to submitting their VAT return.

The level of evidence required in the absence of a VAT invoice is high and to avoid having to provide this, the business should chase up missing invoices prior to submitting their VAT return.

10. VAT claimed on non-vatable items

Finally, once registered for VAT many businesses make the mistake of assuming that VAT is chargeable on everything and therefore assume that all business expenses include VAT. Recovery of VAT on air fares, train fares, and taxis is a common blunder. Passenger transportation is usually rated at zero. Taxi fares are frequently exempt from VAT if the supplier is not VAT registered. VAT paid in other EU Member States could be reclaimed on the VAT return, but an EU claim can be filed separately.