Common VAT Problems

1. Getting the Timing Right

Timing is crucial. Every transaction must be shown in your VAT return if the 'tax point' (the point at which VAT is accountable) falls within your 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, as a supplier, issue a VAT invoice up to 14 days after the basic tax point, the date at which the invoice was issued becomes the tax point. This reflects application of the '14-day rule'.A VAT Business Advice Centre may agree an extension to the 14-day rule.
• If you, as a buyer, receive a VAT invoice up to 14 days after the basic tax point, you can assume that the invoice date is the tax point, unless the invoice shows a separate tax point date.
• With continuous supplies, there is a tax point when a VAT invoice (eg when you are billed for electricity or gas) is issued or payment is made - whichever is earlier.

1.2 As a buyer, you cannot reclaim the VAT you paid without a valid VAT invoice (see 2.1).

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

1.3 You can claim relief later for VAT paid on bad debts.

• The invoices must be more than six months overdue and you must have written them off in your accounts.
• You must write off debts in a specific VAT bad debt account but no longer need to tell customers in writing 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 VAT they owe by applying a flat-rate percentage to their turnover.

• The flat-rate percentage depends on your trade sector, so if your VAT payments as a percentage of turnover generally work out low, you could lose out.
• You must continue to issue tax invoices to your customers, but need not record details of invoices issued or received.
• To qualify, your annual turnover (excluding VAT) must be less than £187,500 (including exempt and zero-rated supplies). Your taxable turnover (excluding VAT) must be less than £150,000.

1.6 With the annual accounting scheme you only need to file one VAT return each year. You make nine monthly interim VAT payments based on an estimate of your total annual VAT bill with the balancing payment due when you submit your return.

• Businesses with a turnover of up to £1.35 million may apply to use the system.
• Any business under the threshold can use the scheme from the date of VAT registration.
• The leaving threshold is £1.6 million.