In the current economic climate, businesses are facing immense pressure placed upon their cashflows and consequently, delaying payments to suppliers, including between connected companies.  This can cause a potential VAT ‘headache’.

In this Topical Tip we set out some basic, but important VAT points to be mindful of in this situation, for both the customer and supplier:

Customer

If a business can adopt the VAT cash-accounting scheme, then input VAT is reclaimed when payment is made.  For most businesses that do not or cannot adopt this scheme, input VAT claimed on purchases by a VAT registered business should be repaid to HMRC if the business fails to pay its supplier within 6 months.

The ‘relevant date’ upon which to base this 6-month test is:

• the date of supply, or
• if later, the date on which the sum became payable (i.e. the due date).

This repayment should be included on the return the period in which the 6-month period falls.  In many instances, businesses will have slightly longer than the 6 months to pay the invoice before VAT is repayable, depending on when the VAT quarters end.

A simple illustration:

• Co A issues an invoice to Co B dated 15 September 2019. The payment terms are on presentation.
• Co B’s VAT quarter ends on 30 November 2019.
• Co B will claim the input tax on the return to 30 November 2019.
• The 6-month time limit expires on 15 March 2020.
• So long as Co B pays the invoice by 31 May 2020, i.e. the VAT period in which the 6-month period ends, there is no repayment to HMRC of the input tax.
• Co B has in effect had an additional month and a half to pay the invoice before the need to pay back input VAT to HMRC.

Where input VAT has been repaid to HMRC this can be reclaimed again in the VAT period in which the payment is eventually made.  It is sensible, that when payments are made, clear records of the allocation and method are made.  If made by cash, then it is wise to have the supplier issue a receipt or statement.

Connected companies

With regards to payment terms, when invoices are between friendly, connected companies they perhaps do not have an agreed due date.

A recent case, The Premspec Group [2020], highlighted an important point around timing:

The Premspec Group Ltd and its sister companies were all under the control of the same individual, a shareholder/director.  In the early years of the company, the sister companies acquired and supplied goods and services to Premspec, as it did not have the necessary credit status nor available cash to fund these itself.

The payment terms to the sister companies was not documented.

Premspec recovered the input tax on the purchases from these connected companies, but did not pay them on the basis, it was argued, they were payable no later than 10 years from commencement of its business in July 2013.  The related companies did account for the VAT on the sales and bad debt relief (see below) had not been claimed.

HMRC denied the input VAT recovery on the basis the relevant date was the invoice date, however the First Tier Tribunal accepted the company’s evidence that, although undocumented, it had been granted a period of credit and therefore was still within the due date for payment.

Its conclusion was that Premspec was entitled to the credit for input VAT claimed.

It is therefore advisable to have in place formal documentation to support credit arrangements, even between connected companies, to avoid possible VAT complications at a future point.

Remember, under the Government’s Covid-19 help for businesses, payment of the first quarter’s VAT liability will be deferred until the end of June 2020.  Businesses will then have until 31 March 2021 to settle any liabilities that have accumulated during the deferral period.

Supplier

If businesses are under the VAT cash-accounting scheme, VAT is only accounted for and payable to HMRC when received from the customer.  Bad debt relief is therefore automatic. Other VAT retail schemes can benefit from the same effective treatment.

For those businesses that are not within such schemes, as a mirror to the rules detailed above for the customer, bad debt relief (i.e. output VAT recovery) is available where a debt is still unpaid 6 months after the due date, subject to certain conditions.

These include, but not limited to, that output VAT was accounted for on the supply and paid to HMRC, the claim is made no later than 4 years and 6 months from the ‘relevant date’ and the debt has been written off in the supplier’s normal VAT account.

The claim is made by including the output VAT to be recovered on the VAT return for the period in which the debt becomes over six months past the ‘relevant date’.  There are special rules for part payments and offset of mutual supplies.

Within TT315: Reduce debtor days to improve cash flow we provided some helpful pointers to keeping debts under control and getting cash in as quickly as possible, such that bad debt relief is hopefully not necessary.

For assistance on your VAT compliance, debtor reporting and management, as well as your other accounting needs, please contact Barnes Roffe LLP today.