VAT: Proof of payment needed

Paid Invoice With Selective Focus
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HMRC will disallow input tax on purchase invoices which are more than six months overdue for payment if the business can’t prove it has paid the suppliers.

Neil Warren looks at the case of Capital SMA Ltd (TC05991), which discussed the question of how a business can prove that it has paid its suppliers. There are some important lessons for all businesses.

Payment dates

Many businesses adopt the cash accounting scheme for VAT purposes, which means they only account for output tax when payment has been received from a customer, and only claim input tax when they pay their suppliers.

The cash accounting scheme can be adopted by any business that expects its taxable sales to be less than £1.35m (excluding VAT) in the next 12 months. It does not require HMRC’s permission to adopt the scheme (see VAT Notice 731, para 2.1).

If a business is not on the cash accounting scheme it can claim input tax according to invoice dates (a cash flow advantage), but must also account for output tax on the invoice date or receipt of payment (whatever is earlier). What happens in this situation if a purchase invoice remains unpaid for many months?

Six-month deadline

The VAT regulations (see VAT Notice 700/18, section 4) state that if payment to a supplier is overdue by more than six months, then any input tax claimed on an earlier VAT return must be repaid to HMRC. This clawback of VAT should be declared on the VAT return which covers the period in which the six-month payment period ends. That six-month period is deemed to commence on:

  • the due date of payment for the invoice in question; or
  • where an invoice does not show a due payment date, the invoice date.

Example 1

John is VAT registered as a builder and doesn’t use the cash accounting scheme. He received an invoice from a subcontractor for £1,000 plus VAT on 31 March 2017, on 30-day payment terms, so the invoice is payable by 30 April. John can claim input tax on his VAT return that includes 31 March. But if the invoice is not paid by 30 October, he must include an input tax credit on the VAT return that includes this date. He can claim input tax on a future VAT return if he pays the subcontractor.

Capital SMA case

In the case of Capital SMA, HMRC disallowed some input tax claimed by the company on its April 2015 return under the six- month rule. The taxpayer’s appeal was based on the argument that it had paid for the invoices by cash, highlighting cash withdrawals in the company’s bank statements to support its argument.

However, the tribunal agreed with HMRC that payment had not been made and dismissed the appeal. The company provided no evidence from suppliers confirming payment had been made, such as a payment receipt or correspondence. The amounts for cash withdrawals did not reconcile with any particular invoices.

HMRC also issued a suspended penalty for careless behaviour and the tribunal confirmed that this was correct both as a principle and the amount charged.

Learning points

The taxpayer’s appeal was always likely to fail due to lack of evidence, but there are important learning points from this case:

Pay electronically

Nowadays most payments are made electronically, but many businesses still deal in cash (perhaps to save bank charges). The business must be able to show some evidence of the payment to the supplier for VAT purposes. This also makes sense on a commercial basis. It might be useful to retain supplier statements to prove that payment has been made.

Confirm cash payment

In some cases, it might be worth asking suppliers to stamp any invoices paid in cash. It is important that supplier invoices clearly show the full details of the business including: address, VAT registration number, goods supplied etc. If the sale is for £250 or less, a supplier is allowed to issue a less detailed tax invoice, but these invoices must still show all of the relevant detail about the transaction (see VAT Notice 700/21, paras 5.4 and 5.5).

Disputed invoices

Where an invoice is in dispute, then no input tax adjustment is needed if the supplier has agreed to extend the payment deadline while the problem is being resolved. This means that the supplier can’t claim bad debt relief on its sales invoices, so HMRC will not be out of pocket if the customer does not credit their input tax (see VAT Notice 700/18, para 4.4).

About Neil Warren

Neil Warren

Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.

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16th Aug 2017 10:59

On the face of it this looks a harsh judgment if the taxpayer had valid VAT invoices. However I suspect that the devil is in the detail and wonder if for example the invoices were addressed to the taxpayer. If not I suppose they could be used time and again by anybody who dealt in cash on occasions. It looks as if my advice to clients that a valid VAT invoice is always needed to reclaim input tax is only OK up to a point.

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16th Aug 2017 12:47

No obvious sympathy but got me thinking about our petty cash. I suspect the VAT man (person?) wouldn't bother due to the amounts involved but maybe banks need to have a think about changing their attitude to company debit cards to avoid this cash problem.

My understanding is that banks won't issue them to limited companies but is that still the case?

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to rememberscarborough
16th Aug 2017 16:25

Have not come across that one! I have a corporate debit card, as have several of my clients. Perhaps you need a better bank?!

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By CazzyT
16th Aug 2017 13:09

We came across an issue where two connected companies had an invoice between them which was settled by way of an adjustment to the intercompany loan.
HMRC applied the above rule because the invoice was not paid in physical funds.
The input VAT was disallowed but the same adjustment was not made on the output side as a sale had been made and there was no bad debt.
They would only allow the input VAT to be claimed in a later quarter having had sight of the bank statement showing the transfer of funds.

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16th Aug 2017 14:36

I should have added that I wonder if HMRC trousered the output tax from the suppliers or whether they even bothered to check the position.

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16th Aug 2017 17:03

In my experience they don't make an adjustment for output tax on the other side 'thomas34' (surprise, surprise!) but they have become increasingly reluctant to off set debtors and creditors against each other which is extremely unfair. I would advise agents to always argue that the 2 should be off set against each other.

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