If a customer doesn’t pay your bill you can get back any VAT on this that you’ve paid over to HMRC. But where do you stand if you’re withholding payment to a supplier because you’re in dispute with them?

Timing your claim

Unless you use HMRC’s cash accounting scheme you can reclaim input tax on purchases for the VAT period in which you received the goods (or services) or a VAT invoice from the supplier, whichever is earliest. But if you don’t pay them in full or in part you have limited time in which you’re allowed to hold onto the VAT you’ve reclaimed.

Six-month rule

You can only keep the input tax reclaimed if you pay the suppliers bill within six months of the invoice date or the date on which payment was made, where this is later. After that you must adjust your VAT return so that you repay input tax to HMRC. Even so this can mean you have use of the money for up to nearly nine months.

Example. Acom has some building work done at a cost of £20,000 plus VAT. This was completed on January 25 2013, but the builders invoice date is February 10. Acom reclaims the £4,000 input tax on its return for the quarter ended January 21 which it flies with HMRC on February 15. It disputes £5,000 of the bill and withholds payment of this plus the VAT of £1,000 (£5,000×20%). Acom must repay the VAT to HMRC with its VAT return for the quarter ended October 31.

Online form filling

In our example, when Acom completes its online VAT return for the quarter ended October 31 2013 it must deduct the input tax relating to the disputed bill from the figure of VAT it’s reclaiming for the quarter, i.e. from the amount in Box 4.

Trap. If you overlook the repaying of input tax for unpaid bills, HMRC will treat this as an error on which it can charge penalty of up to 30% of the VAT involved. But if you correct this quickly the maximum penalty is likely to be reduced to 15%.

Tip. If you miss repaying input tax for the correct quarter, there’s a separate procedure for notifying HMRC. Don’t wait until your next VAT return as this is a popular target for VAT inspectors. Delaying notifications will increase the interest you’ll be charged and possibly the amount of the penalty.

Take Precautions

Make it part of your routine, or that of your bookkeeper, to review unpaid bills at the end of each month. There’s often a facility within accounting and bookkeeping software to “flag” transactions and perhaps produce a report of such items. You can use this to highlight unpaid invoices making it easier to spot those falling over six months.

Note. Where you use VAT cash accounting there’s no need to make a review of unpaid bills because you’re not permitted to reclaim input tax on purchases until the VAT quarter in which you pay for them.

Tip. If you’re in dispute with a supplier and you renegotiate a later payment date for their bill, you won’t have to repay the input tax reclaimed on their original invoice unless you delay payment beyond six months from the new date.