VAT – some common pitfalls

The following areas commonly lead to mistakes in VAT accounting in firms:

Credit notes

Given the number of changes in VAT rates over the last few years, it is common to find that a different rate of VAT has been used in a credit note than was used in the initial invoice. The rate of VAT to be used for a credit or debit note is the one in force at the tax point of the original supply.

Bad debts

Before reclaiming VAT, the following conditions must be satisfied:

• VAT on the original supply has been accounted for and declared to HMRC;

• The debt has been written off in your VAT account and transferred to a bad debt account;

• The debt is more than 6 months old and less than 4 years and 6 months old (for older debts, other rules apply);

• The debt has not been sold or factored.

Remember that if the debt is subsequently paid, the reclaimed VAT must be repaid to HMRC.

 Disbursements v. recharges

• Disbursements – where you are acting as agent - e.g. where a solicitor is paying stamp duty, land registry or trademark searches.
  - VAT is not reclaimable by you unless the client can be given a VAT invoice.

• Recharges – in the course of providing service - e.g. travel expenses in connection with the work you have been engaged to supply.
  - Usually VAT can be reclaimed provided the supply you make is taxable.

 Counsel’s fees

If a counsel’s fee note is addressed to the firm you are entitled to reclaim the input VAT. Counsel’s VAT invoice may be amended by adding the name and address of the client to it and inserting “per” before your name and address (as agent). The fee note from counsel will then be recognised as a valid VAT invoice in the hands of the client.

Entertaining

VAT can only be reclaimed on certain staff entertaining, and is not normally reclaimable on business entertainment expenses. However, you can normally reclaim VAT on business gifts where the total does not exceed £50 per person per year. VAT is usually recoverable on non-UK client entertaining.

Note: HMRC’s “careless error” penalty can be a maximum 30% of the underpaid tax, plus interest.