Helping to get your VAT return right
In my three part series of newswires published in summer last year I discussed how your VAT scheme can be utilised to improve cash flow. There are some more technical tips which typically relate to the legal profession, which should also be considered when preparing your VAT returns, as follows:
1. VAT Treatment on Disbursements
It is important to ensure that input VAT is not reclaimed on disbursements which are specifically payable by the firm on behalf of your 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 because the expense forms part of the actual service you are delivering to your client. 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. Deposits & payments on account
Although HMRC state that the date when services are considered to be supplied for VAT purposes is the date when the service is carried out, for transactions where a VAT invoice is issued but payment is received in advance, the time of supply is the date in which the payment is received. In reality the tax point is the earliest date.
3. Bad debt relief
Output VAT on costs which remain unpaid may be reclaimed from HMRC. Unpaid costs should be considered as ‘bad’ or ‘irrecoverable’ from your client and must be 6 months old before such a claim is made. A similar approach must also be taken towards creditors where payment remains outstanding after 6 months has passed, repaying the input VAT over to HMRC that you originally claimed.
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 in the UK. Advice should always be sought if you are unsure.
Preparing your VAT returns correctly will help to avoid unnecessary interest and penalties being imposed by HMRC. HMRC charge penalties for errors in VAT returns if they believe you have not taken reasonable care in order to prepare your VAT return accurately. Reasonable care is considered to be:
- Keeping reliable records to help prepare accurate tax returns
- Checking what the correct position is when you don’t understand something
It also indicates sound financial control, a mandatory principle of the SRA.
For more information and advice please contact the Professional Practices team.