VAT: Problem of overpayments to suppliers
A case concerning parking machines that overcharged customers reminded Neil Warren about the knotty problem of how to account for VAT windfalls.
I had a VAT query from an accountant recently: can our client claim input tax on writing-off purchase ledger debit balances? The client doesn’t use the cash accounting scheme.
The initial challenge was to recall my days of learning double entry bookkeeping to be clear what a purchase ledger debit balance actually means. It means one of two things: either suppliers have been overpaid, or suppliers have issued credit notes but not given refunds to turn the credit note into money.
If the reason for a debit balance is because credit notes have not been repaid by the supplier, there is no VAT to claim if the balance is written off in the accounts because, for example, the supplier has disappeared or gone into liquidation. Input tax will have been claimed on the original purchase invoices and then reduced when the credit notes were entered on the system – the VAT returns are correct.
The challenge here is to establish if the overpayment is because purchase invoices have not been processed into the purchase ledger, which would mean input tax has been underclaimed, assuming the supplier is VAT registered. If the amounts of tax are worthwhile, it will be worth asking the supplier for recent statements to track any omitted purchase invoices.
If the reason for the overpayment is because the supplier has simply been paid too much money because of bad accounting, there is no more input tax to claim.
If a purchase invoice is for £100 plus £20 VAT, and a supplier is paid £150 by mistake, and keeps the extra money, the customer’s input tax is still £20 because the consideration for the supply of goods or services is £120 including VAT. The supplier only accounts for output tax of £20 and not £25, so there is consistency in the VAT treatment.
Overpayments at car park machines
The subject of VAT and overpayments with car park fees has done the tribunal rounds over the years. It relates to the situation where a customer does not have the right mix of coins, so overpays - for example, paying £2 instead of £1.85. The machine does not give change. Is the fee £2 or £1.85 for VAT purposes? Parking fees are standard rated.
In the case of Borough Council of King’s Lynn and West Norfolk (TC7996), the taxpayer argued that the 15p overpayment in my example was not ‘consideration’ that was subject to VAT. The council had submitted a VAT652 claim to HMRC in September 2019 for overpaid output tax of £4,519.
HMRC contended, and the tribunal agreed, that the extra 15p represents a ‘counter offer’ by the vehicle owner and was subject to VAT. This makes sense and is consistent with the binding case of National Car Parks Ltd, which reached the Upper Tribunal nearly four years ago. The tribunal in the latest King’s Lynn case saw no relevance to the fact that it related to a public authority rather than a commercial company.
The good news with the King’s Lynn case is that the vehicle owner can claim input tax based on the amount he has paid to the car park owner, ie the 15p overpayment is part of the value of the supply. This is different to my earlier tale about paying suppliers too much money because of bad accounting controls. Some you win and some you lose.