You recently realised that you overlooked VAT paid on business expenses reimbursed to your employees. As some of them date back several years are you now too late to recover the VAT?
Time limit
Unless you use the cash accounting scheme, you should claim the VAT paid on purchases (input tax) on the return for the quarter in which you received the goods or services or, if later, when the VAT invoice was received. However, there’s an overriding time limit, but this is often misunderstood. The VAT time limit is four years from the return period in which you received evidence that you paid VAT, not four years from when the transaction took place.
Example. Acom Ltd had its premises redecorated on 10 March 2015 and received an invoice for the work on 1 May that year. Its VAT quarters end on 31 March, 30 June, etc. The last chance it has to claim the input tax for the redecoration work is in its return for the period to 30 June 2019.
Tip. If you receive a corrected invoice from a supplier because they used the wrong VAT rate, or they’ve been forced by HMRC to register for VAT retrospectively, you can, by concession, reclaim the input tax within three years of receiving the invoice.
Late claims
Where you claim input tax later than the VAT period you could have but within the four-year limit, the amount must be worked out according to the circumstances which applied when you were first entitled to make a claim. For example, if you’ve discovered input tax previously overlooked for a purchase made when you weren’t registered and not entitled to reclaim under the pre-registration rules, you can’t reclaim it now.
Late claims and partial exemption
Late claims are especially tricky if your business is partially exempt because it can retrospectively affect the annual adjustment and the impact of the VAT de minimis limits.
Example. Acom Ltd makes a claim for input tax in the quarter ended 31 March 2019, which it was entitled to claim in January 2018. It must therefore review its partial exemption claim for the quarter ended 31 March 2018 and its annual adjustment for the year ended 31 March 2018, i.e. the VAT periods when the claim could have been made and not those when it was actually made.
Partial exemption cut-off
There’s potentially a further complication for late claims if your business is partially exempt. If the quarterly VAT period when the input tax was incurred is more than four years ago, no correction can be made, but you must still review and correct the annual adjustment if that’s within the four-year time limit. This can increase or decrease the input tax reclaimable for the earlier period and you’ll have to account for this by adjusting the return for the current period.
Making an adjustment
VAT corrections for earlier periods can be made either by adjusting your VAT return for the current period or by sending a separate notification to HMRC.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.