News
March 2009
VAT Update
Recession tips on VAT
Here are two recession beating tips as far as VAT is concerned:
- Don’t forget to claim VAT on bad debts
It is an unfortunate fact that bad debts are a feature of economic recessions.
However, one positive point is that you can reclaim the VAT element of any unpaid sales invoices that you have already included on a VAT return – as long as certain conditions are met:
- the debt must be at least six months overdue for payment. In the case of an invoice raised on thirty-day payment terms, this means the debt will qualify for relief seven months after the date of the invoice
- the debt must be written off in your accounting records i.e. credit the customer’s ledger and create a bad debt account
- you must have paid the VAT to HMRC on an earlier VAT return i.e. when the invoice was first raised.
- the debt must not have been paid, sold or factored under a valid legal agreement
If the conditions are all met, you can reclaim the VAT element of the debt within Box 4 of your next return.
Another option is to consider if you could use HMRC’s cash accounting scheme where you only account for VAT on a return when you receive payment from your customer. This gives automatic bad debt relief - contact us to see if you are eligible to use the scheme.
-
Lease rather than buy vehicles
One decision taken by a company with cash flow difficulties could be to lease vehicles in the future rather than buy them as an outright purchase.
The implication of leasing an asset is that VAT is usually charged on monthly hire payments made to the leasing company rather than when the asset is initially purchased by the business. The leasing company will often issue an annual tax invoice in advance, which serves as evidence for the lessee to reclaim input tax on each monthly payment. Don’t be tempted to claim all of the year’s input tax when the first payment is made.
The key point with leasing cars is that a 50% input tax restriction applies, unless the car is used exclusively for business purposes and never available for private use (unlikely - think of the emergency trip to the supermarket) or is primarily used by a business involved in car hire, taxi work or driving instruction. The 50% restriction recognises the fact that the vehicle will be partly used for private or non-business purposes.
