Common VAT Problems

2. Getting the Paperwork Right

2.1 You must issue full VAT invoices when you supply to VAT-registered businesses. It is easy to get this wrong.

• A full VAT invoice should include a unique identifying number and your name, address and VAT number and your customer's name and address. It should also include the invoice date, the tax point, the date of issue (if this is different from the tax point), the type of supply (such as sale or rent), a description of the nature and amount of the goods or services, your cash discount rate, the VAT rate, the total excluding VAT, the VAT amount and the total payable.
• VAT invoice numbers must be sequential, with no unexplained gaps.
• Duplicate invoices must be clearly marked.
• If you issue other documents (such as pro-forma invoices), which show the same details as a VAT invoice, they must be clearly marked 'Not a VAT invoice'.

2.2 If you make retail sales and a customer asks for a VAT invoice, you may be able to use a simpler alternative.

• For retail sales under £100 (including VAT), you can issue a 'less detailed' VAT invoice.This shows your name, address and VAT number, the date of supply, a description of the goods or services, the amount (including VAT) and the VAT rate charged.

2.3 You must keep VAT invoices for purchases, to reclaim the tax you have paid to your suppliers.

• If you lose a VAT invoice, you must get a duplicate invoice from your supplier.
• If an invoice shows product codes rather than descriptions, you must also keep a copy of the supplier's product list.

2.4 If you settle an invoice on behalf of a third party, you will not be able to reclaim VAT.

• VAT can only be reclaimed by the recipient of the supply.
• Consider settling the net value only. It may be worthwhile for third parties on whose behalf you settle bills to pay the VAT and then reclaim it in their own right.

2.5 Watch out for arithmetical errors.

• If you are given a less detailed invoice which includes VAT but does not show it as a separate item, confirm the items purchased are subject to VAT and calculate what you can reclaim by multiplying the amount on the invoice by 7/47, not by 17.5 per cent.

2.6 If you sell your business, the buyer can apply to retain your VAT registration number.

• You must retain your VAT records upon the sale of the business, unless the buyer is retaining your VAT number. In this case, you must provide information to the buyer so they can comply with their VAT duties.