If a business is registered for Value Added Tax (VAT) then it must charge VAT on all products and services and then pass this onto HMRC. However, this also allows companies who are registered to reclaim VAT on all the goods and services used by your business.

In order to claim VAT back, it is important to understand what and services you can and can’t claim VAT on.

What can I claim back on VAT?

You can only claim back VAT on services and goods that are used wholly and exclusively for your business, this could include: office supplies, transport costs and services such as accountancy as they are all used solely for the purpose of the business. If a supplier does not give you back a valid VAT invoice then in the majority of cases you will not be able to claim VAT back. 

If a service or good is used partially for the business and partially for home use, you may also still claim back a proportion of the VAT that is equal to the amount used by your business. An example of this could be home broadband. 

If you raise an invoice and pay VAT on the expected income however the invoice is not paid by a customer, this is considered bad debt. The VAT that has been paid on the invoice can then be claimed back from HMRC on your next return. Furthermore if the customer then later does pay the invoice the VAT can then be repaid then. 

How is VAT recovered?

A VAT– registered business has the right to recover the VAT charged and therefore the recovery can be exercised before a supplier has been paid for the supply in question. 

To recover the VAT a VAT-registered business must complete a VAT return for the period that is in question. VAT returns are generally completed quarterly. 

To return VAT through the VAT return the following is calculated: 

• The input tax is subtracted from the output tax that the business is required to pay HMRC. 
• If there is then an excess of recoverable input tax over output tax the business will be able to claim a VAT return from HMRC equal to that excess. 

A business must keep the appropriate records to justify the output tax chargeable by the business for the period in question. 

What proof do I need to reclaim VAT?

HMRC guidelines dictate that you must have the appropriate documentary evidence to reclaim VAT and provides the following examples:

• VAT invoices which show all the information required by law
• self-billed invoices, with all the required details, and only if HMRC has agreed you can use them
• less detailed invoices where the tax-inclusive value of the supply is £250 or less
• construction industry authenticated receipts for stage payments

If the invoice or receipt that you are claiming VAT for is in your name for goods or services supplied you can not reclaim the VAT simply by “putting it through the business”, however if the invoice is in someone else’s name i.e. an employee, and the purchase was made for the business, you would be entitled to reclaim the VAT. 

If you do not have a receipt or invoice to back up the VAT claim HMRC will accept if you can show proof that:

• The purchase took place;
• The purchase was made for business purposes;
• Reasonable checks were made regarding the supplier; and 
• There was a commercial arrangement between you and the supplier.

HMRC Penalties for VAT evasion

HMRC usually deal with these cases under the civil evasion penalty regime. In relation to VAT and VAT credits, the prescribed penalty is 100% of the amount evaded and with respect to refunds and repayments it is the aggregate of the amount of input tax which was overstated and output tax  which was understated. Penalty mitigation may apply (in terms of a reduction up to 40%) if one is able to self-report and provide an early and honest explanation.

Sometimes though, if the case meets one of the criteria for criminal prosecution, then HMRC will seek to commence proceedings in the criminal courts. Intentional evasion of VAT is an offence under section 72(1) of the Value Added Tax Act. The maximum penalty at the Crown Court is 7 years imprisonment and unlimited fine.

How far back can HMRC investigate tax returns?

An investigation will often start by enquiring into last year’s tax return and the time HMRC can go back into your tax affairs varies depending on the seriousness of the charge against you. The tables of time limits in HMRC’s Compliance Handbook provides a full summary. The time limits for Captial Gains Tax, Corporation Tax, Income Tax, PAYE and VAT are all the same. Instead, the amount of time HMRC can go back depends on whether the mistake made was innocent, careless or deliberate according to the Taxes Management Act 1970.

HMRC will first investigate the most recent tax return. If they find no mistakes, then the investigation will be closed. If HMRC find a mistake was made innocently, then the investigation is permitted to go back 4 years. If HMRC decides the mistake was due to negligence or careless behaviour then the investigation can go back 6 years. If the mistake is construed as a deliberate attempt to avoid the payment of tax, then the investigation can go back 20 years.

In any investigation, especially one scrutinising tax returns over many years, it is important to obtain professional legal advice at an early stage. We ensure that you make the right decisions at every stage and challenge HMRC’s requests if appropriate in the circumstances.

What information will you need to provide during a tax investigation?

The initial letter sent by HMRC will normally outline the information required. If the investigation is uncomplicated and in a specific area, then the amount of paperwork will be self-contained. However, other cases will involve years of financial documentation, bank statements and information. HMRC have extensive powers to request information from both you and third parties. As a last resort, HMRC have the statutory power to issue determinations if there is no co-operation. A formal detailed disclosure report is generally only required when an enquiry is opened under Code of Practice 8 or Code of Practice 9.

As specialist Tax Disputes Solicitors we are able to acquire, organise, interpret and present the information required to HMRC on your behalf.

How long will a tax investigation last?

It depends on the scope and nature of the HMRC investigation. The opening letter issued by the HMRC is usually a good guide on the potential length of any investigation. Some tax investigations finish after one letter; other investigations can take months with HMRC consistently requesting more information; and some investigations can be extending to longer than a year if involving complex tax structures or large businesses.

It is important to engage professional advice early on to minimise the length of any investigation as we identify any problems quickly and efficiently to get to the heart of the matter.

Expert London Tax Lawyers

If you need HMRC Tax Disputes advice, we are available to aid you at every stage of the HMRC appeals process. Members of our legal team have first-hand experience and working knowledge of the internal workings of HMRC. We can provide you with the very best representation in negotiations, throughout the HMRC internal review process and in front of the Tax Tribunal. Our team specialises in successfully challenging HMRC decisions and will assist you in every aspect including developing a strategy.

We are experts in adeptly presenting evidence and employing bespoke arguments combining the facts of your case, previous cases and current legislation to ensure your appeal is a successful one. We provide urgent advice and representation to clients from our unique expert team of established tax and duties specialist solicitors and barristers with a proven track record of delivering authoritative results. Just call us on 0207 1830 529, or email [email protected].