Top tips to avoid errors on your VAT returns
Following on from our June update relating to the treatment of VAT on disbursements, we have come up with a list of top tips to help you avoid errors on your VAT returns. There are some common errors which typically relate to the legal profession as follows:
1. VAT Treatment on Disbursements (from our June 2011 newswire)
It is important to ensure that input VAT is not reclaimed on disbursements which are specifically payable by the firm on behalf of the client such as land registry charges/medical fees etc as these costs are not recharged to the client with output VAT added. Reclaiming input VAT on disbursements such as mileage/ parking etc by the firm is permitted as these are treated differently by HMRC. Items such as these are recharged to clients with output VAT added and should be billed as part of the firms profit costs before all other disbursements are listed out.
2. Tax point – work finished but not billed
HMRC state that the date (tax point) when services are considered to be supplied for VAT purposes is the date when the service is carried out and all the work (except invoicing) is completed. For example if the PI department have unbilled time for work completed before January 2011, VAT should be charged for that work at 17.5% and not 20%. Evidence such as timesheets etc should be retained to support the VAT rate charged should the VAT man ask.
3. Deposits & payments on account
Again on tax points, the basic rule states that services are deemed to be supplied for VAT purposes at the date the service is carried out or where a VAT invoice is issued. Both these are superseded where payment is received in advance, in which case the time of supply is the date on which payment is received.
4. Place of supply
Where you supply legal services to another business in the EU, your supply is treated as being made in that EU country. Your invoice should confirm that the invoice should have VAT accounted for by your client under the reverse charge procedure, and no UK VAT should be accounted for through your VAT return.
There are exceptions to this, for example where you assist a foreign client with the sale or purchase of land. The VAT rules tend to follow the country in which the land or property is situated. Advice should always be sought if you are unsure.
5. Bad debt relief
Output VAT on costs which remain unpaid may be reclaimed from HMRC. Unpaid costs should be noted in your accounts specifically as ‘bad’ or ‘irrecoverable’ and 6 months must have passed from the due and payable date of the debt before such a claim is made.
This is also the case where you have not paid invoices but have reclaimed input VAT. You should have a system in place to identify any such invoices and ensure input VAT is repaid to HMRC on the next VAT return.
6. Motor expenses
An employer may reimburse employees for business mileage based on clear, accurate business mileage records. The tax free reimbursement for an employee is currently 45p per mile for the first 10,000 business miles reducing to 25p thereafter. Business mileage calculations should take into account the employee’s contractual place of work and take account of the temporary work place rules as ordinary commuting costs cannot be reimbursed tax and NIC free.
The maximum amount which may be reimbursed for business mileage travelled in a company car depends on engine size and fuel type. These amounts are available from your usual Moore and Smalley contact or the HMRC website www.hmrc.gov.uk.
The input VAT which may be reclaimed on business mileage (supported by a VAT receipt) is also dependant on engine size and fuel type and is reviewed regularly by HMRC. These changes are also available again from us or the HMRC website.
Partners who also lease their business vehicles are only permitted to recover 50% of the input VAT charged on their monthly lease instalment, but 100% may be recovered on any maintenance charge.
Input VAT incurred when entertaining clients is irrecoverable. This includes lunches, working sandwich lunches etc. However, any subsistence costs incurred by staff can be recovered and this may be worth reviewing as incorrect identification of business entertaining, staff subsistence etc can lead to errors for both input VAT and benefits compliance.
If you require any advice regarding potential errors on your VAT return please contact us and we will be happy to help. You shouldn’t make any adjustments to your VAT returns without seeking advice first.