When must you repay VAT on overdue bills?

HMRC’s bad debt rules mean that if a customer doesn’t pay your bill you can at least reclaim any VAT you’ve accounted for. But what’s the VAT position if you’re in dispute with a supplier and you’re withholding payment to them?


Standard VAT method
As you know, accounting for VAT using the normal method involves charging or reclaiming VAT when you issue or receive an invoice. This means you have to account to HMRC for VAT you’ve charged on a sales invoice, even if you haven’t been paid. On the other hand, you can reclaim VAT on purchase invoices you’ve received, even if you haven’t paid them, but not indefinitely.


Repaying VAT
There’s a six-month time limit for purchase VAT to be reclaimed, starting from the so-called tax point. This is the date on the supplier’s invoice or the date the goods or services were supplied if that’s more than 14 days earlier. If you haven’t paid the bill after six months, you must adjust your next return and repay the VAT to HMRC. Even so this could mean you have use of the money for nearly nine months.

Example. Acom refits its offices at a cost of £24,000 plus VAT. The job was completed on 28 June 2016, and the fitter’s invoice is dated 10 July. Acom reclaims the £6,000 VAT on its return for the quarter ended 30 June. However, it disputes £5,000 of the fitter’s bill and withholds payment, plus the corresponding VAT of £1,000 (£5,000 x 20%). Unless Acom pays the disputed sum it must repay the £1,000 VAT, but not until its return for the quarter ended 31 March 2017.


How to adjust your VAT return
When Acom completes its return for the quarter ended 31 March 2017 it must deduct the input tax relating to the disputed bill from the figure of VAT it reclaims, i.e. from the amount that goes in Box 4 of the VAT return.

Trap. Failure to make an adjustment can result in HMRC issuing a penalty of up to 30% of the VAT involved. If you forget to make an adjustment, and it’s a genuine mistake, as long as you correct it before HMRC notices, it won’t usually charge a penalty.

Tip. If you miss repaying input tax for the correct quarter, and the amount is large, i.e. over £10,000, there’s a separate procedure for notifying HMRC (see The next step ).


Good bookkeeping
Bookkeeping software allows you to flag transactions so they can easily be identified and reviewed later in the event of, say, a disputed bill. Use this procedure for unpaid invoices for which you might need to repay VAT. If your bookkeeping is done manually, keep a separate record of unpaid bills for the same purpose.

Tip. If you dispute a bill with a supplier and you renegotiate a later payment date, you don’t have to repay the VAT reclaimed on their original invoice unless payment is deferred beyond six months from the new date.

Note. Where you use VAT cash accounting, instead of the normal method there’s no need to make a review of unpaid bills because you’re not entitled to reclaim VAT on purchases until the quarter in which you pay them.


Reproduced with the permission of Indicator – FL Memo Limited. For subscription information call 01233 653500;