TTR Barnes

If a customer doesn’t pay you, you can claim back any VAT on this payment that you’ve already paid over to HMRC. But what happens if you are withholding payment to a supplier because you’re in dispute with them?

Unless you use the cash accounting scheme, you can reclaim input tax on purchases for the VAT period in which you receive the goods or services or a VAT invoice from the supplier, whichever is the earliest. But if you don’t pay a supplier in full or in part, there is a limited amount of time for which you’re allowed to hold onto the Vat you’ve reclaimed.

The rule is that you can only keep the VAT reclaimed if you’ve paid the supplier’s VAT within six months of the invoice date or the date on which the payment was made, where that is later. After that, you must adjust your VAT return so that you repay input tax to HMRC. Even so, this can mean that you have the use of the money for up to nearly nine months.

If you overlook repaying the input tax for unpaid bills, HMRC will treat this as an error on which it can charge a penalty of up to 30% of the VAT involved.

If you miss repaying input tax for the correct quarter, there is a separate procedure for notifying HMRC, depending on the amount involved.

It’s vital that you or your bookkeeper review unpaid bills at the end of each month and preferably look into whether your accounting software has the facility to produce a report of such transactions, so they’re not missed.

For further help or advice, please speak to John Mutch.