One of the most complex and forever changing areas of VAT is irrecoverable VAT, also referred to as blocked input VAT or non-deductible input VAT.
Irrecoverable VAT is the input VAT that a business has incurred on purchases and other costs which it is not permitted to recover via its VAT Return.
There can be various reasons why this VAT cannot be recovered, including because:
– the costs relate directly to VAT exempt business activities,
– the costs are specifically disallowed for VAT purposes, e.g. business entertaining, certain car related costs,
– the costs relate to non-business activities,
– the costs fall into the “mixed use” pot of the business’ partial exemption method and are only partially recoverable, or
– It is foreign VAT.
This is a highly technical area and as a result one that is frequently the subject of litigation and Budget changes.
Irrecoverable VAT processed incorrectly can have a major impact on the business – getting it wrong by either under-claiming input VAT or over-claiming input VAT can lead to decreased cash flow, building in hidden VAT costs in transaction chains and incorrect VAT Return reporting.
Some common problem areas are:
– VAT not claimed (such as ‘foreign’ Travel and Expenses),
– VAT wrongly charged by vendors (such as in intra-EU cross-border acquisitions),
– Reverse charge VAT not properly processed on goods or services,
– Partial Exemption not dealt with adequately, and
– Exposure to VAT penalties from incorrect reporting on the VAT Return.
Let’s cite one example from the list above; Accounts Payable departments often process supplier invoices where VAT has been charged incorrectly. This most often arises on intra-EU cross-border invoicing where a lack of understanding of the international VAT rules leads suppliers to take the cautious position and charge VAT even where it is not properly chargeable. This may be processed for payment and is not reclaimable either because it is ‘foreign VAT’ and not reclaimable on a UK VAT Return, or because the tax authority has refused a refund because the VAT was incorrectly charged.
Ultimately, making sure Accounts Payable staff have the right tools and knowledge to their job is vital.
Are you confident that your business has implemented the rules correctly and is on top of the latest developments?
To test your knowledge, or the knowledge of your accounts payable function, you can use our free online VAT Knowledge Assessment. Our VAT Knowledge Assessment aims to capture current VAT knowledge within business roles and functions and the VAT quiz questions are based on real-world commercial examples accumulated from many years of our VAT experts advising businesses on international VAT issues and scenarios.
After staff members have submitted their VAT Knowledge Assessment, their responses will be assessed by our team of VAT experts. Their responses will be compiled into a Report that will feedback on potential VAT knowledge gaps which will enable you to target potential problem areas and work towards proactively implementing a strategy for improving VAT decision making, reducing risk and producing better cash flow.
The VAT Knowledge Assessment comprises 25 multiple choice questions and will take approximately 20 to 30 minutes to complete online.