What is VAT? The idea of VAT is primarily to phase out the cascading effect of taxes. When supply is made it is taxed, and then when it is sold further, it is taxed again on a value inclusive of the tax charged in the previous stage of the supply chain. So, until the supplies reach the final consumer, the tax burden keeps on adding up at each stage, making it costlier for the end customer. This is called ‘tax on tax’ or cascading effect of taxes. To wipe this out, the input tax paid by the business can be claimed back so that it does not form part of the cost of supply. VAT can be reclaimed only on goods and services used for business purposes. No reclaim is available for goods and services used for private consumption.
Certain circumstances in which VAT cannot be reclaimed
Certain circumstances in which VAT cannot be reclaimed
The VAT cannot be reclaimed on the following:
- Goods and services that are used for private use.
- Goods and services that have been used by businesses to make VAT-exempt supplies.
- Business entertainment cost.
- Goods and services bought from other EU countries, except when the VAT is charged under the electronic cross-border refund system.
- Goods sold to business under any VAT second-hand margin schemes.
- Business assets that are transferred as a going concern.
- Goods and services bought while using the VAT Flat Rate Scheme (except some capital assets worth more than £2,000)
How to reclaim VAT?
The businesses can make a VAT reclaim by deducting it from its output tax liability while preparing the VAT return. If the input tax exceeds the output tax then the business shall be eligible for a refund from HMRC.
VAT reclaim in case of bad debt
Businesses can reclaim VAT paid but not received from a customer if it’s a ‘bad debt’ (written off). To qualify for the VAT reclaim, the debt should fulfill the following conditions:
- The debt must be between 6 months and 4 years and 6 months old
- The debt must have not been sold
- The item in relation to which bad debt has occurred must have not been sold for more than the normal price of the item
Businesses can reclaim them via their VAT Return (by adding then to Box 4 figure) and keep records about the debt.
The relief must be paid back if the debt is paid back. This can be done by adding the amount to ‘Box 1’ figure in the VAT return.
VAT refund
Once VAT Return is submitted online, HMRC automatically calculates whether the business is due a VAT refund or not for that particular VAT accounting period. Based on VAT return if any refund is due then HMRC usually makes the payment within 10 days.
Evidence for VAT reclaim
VAT reclaim can be made based on invoices properly indicating the VAT paid at standard, reduced or zero-rated on purchases. These invoices shall include a date and supplier’s name clearly.
Example
Let’s say the amount of VAT paid on purchases (input tax) = £10,000
The amount of VAT charged on provision of goods and services (output tax) = £15,000
The amount of VAT payable = £15,000 - £10,000 = £5,000
Now, if the amount of VAT paid on purchases (input tax) = £10,000
The amount of VAT charged on provision of goods and services (Output tax) = £8,000
Then, amount of VAT refund = £8,000- £10,000 = (£2000) i.e. business is eligible for a VAT refund of £2,000.
Repayment of VAT reclaimed
If the supplier has not been paid within 6 months from:
- The date of supply or
- The due date of payment (if it occurs later)
Then the amount claimed as input tax on such supply needs to be repaid back to HMRC.
VAT reclaim on purchases made prior to VAT registration
Businesses can reclaim VAT on some purchases and services made before registering for VAT. From the date of VAT registration the time limit is:
- 4 years for goods still present or that were used to make other goods that are still present.
- 6 months for service.
It is worth noting that VAT can be reclaimed on only those supplies which relate to the business now registered for VAT. Also, these supplies must be used for ‘business purpose’ only.
Making a VAT Reclaim when a business is operating under the VAT flat rate scheme
The business entities that have opted for the VAT flat rate scheme cannot reclaim VAT paid on purchases. However, they can claim the VAT they’ve paid on a single purchase of a capital good where the amount of purchase, including VAT, is £2,000 or more.
