My UK company is VAT registered and also on the flat rate scheme.
Well over a year ago I invoiced an EU company for services and added VAT. At the time zero rating was discussed but I was not prepared for that (being on the flat rate scheme) and they concluded in writing they would accept the invoice with VAT. Everything was duly paid.
Now they are asking me to issue credit notes to cancel the invoices, issue new invoices without VAT and transfer the VAT directly back to their bank account. (A genuine request I believe!)
Assuming I could have zero-rated the invoice (debatable perhaps for other reasons), did I do anything wrong by adding, with agreement, the VAT?
Unless it was actually wrong or illegal for me to invoice for the VAT I don't see why I would be obliged to refund it now, especially as its a true expense I cannot reclaim. Is there any legal reference perhaps, stating that it's not illegal to charge VAT when it could/should be zero rated?
Furthermore can they reclaim the VAT somehow? Naturally their VAT rate is much lower so they would have to reclaim from HMRC for this to be effective.