Common VAT Problems

1. Getting the Timing Right

Timing is crucial. Generally every transaction must be shown in your VAT return if the 'tax point' (the point at which VAT is accountable) falls within that particular VAT return period, whether or not payment has been received.

1.1 The tax point is usually the date goods were supplied or services completed (the 'basic tax point'). There are some variations.

• If a VAT invoice is issued or payment is made before the basic tax point, the date of invoicing or payment becomes the tax point, whichever is the earlier.
• If you issue a VAT invoice up to 14 days after the basic tax point, the date the invoice was issued becomes the tax point. It is possible to agree an extension to the '14-day rule' by making an application to HM Revenue & Customs (HMRC).
• If you receive a VAT invoice up to 14 days after the basic tax point, you can assume the invoice date is the tax point, unless the invoice shows a separate tax point date.
• With continuous supplies, the tax point occurs when a VAT invoice is issued or payment is made - whichever is earlier.

1.2 As a buyer, you cannot reclaim the input VAT you paid without a valid VAT invoice.

• If you pay your supplier in advance, you cannot reclaim the VAT element of the payment without a valid VAT invoice.
• If you reclaim input VAT on a supplier's invoice, but fail to pay the supplier within six months you normally have to repay the VAT.

1.3 Relief is available for bad debts.

• The invoice must be more than six months overdue and be written off in a specific VAT bad debt account.
• Customers no longer need to be told that bad debt relief claims are being made.

1.4 In practice, many small businesses use the cash accounting scheme.

• VAT returns are based on payments made and money received during the period, regardless of where the tax points fall.
• Generally, any business with a turnover of less than £1.35 million can apply to join.

1.5 The flat-rate scheme allows small firms to calculate the net VAT they owe by applying a flat-rate percentage to their turnover.

• The flat-rate percentage depends on your trading sector, so if your net VAT payments are generally a low percentage of turnover this scheme may not be of benefit.
• Tax invoices must still be issued, but will not be used to calculate the VAT payable.
• To qualify, annual turnover (excluding VAT) must be less than £150,000.

1.6 With the annual accounting scheme only one VAT return is submitted each year. Nine monthly interim VAT payments are made based on an estimate of the total annual VAT bill. A balancing payment is made when the annual return is submitted.

• Any business under the threshold of £1.35 million can apply to use the scheme from the date of VAT registration.
• The leaving threshold is £1.6 million.