Contractors’ Questions: What if my invoice is missing VAT?

Contractor’s Question:  I did a short stint with a well-known recruiter. Despite the agent reassuring me that he had sent my bank and VAT details to their accounts department, they didn't have them when I rang up to chase late payment. They paid the outstanding invoices eventually, but one was paid exclusive of VAT. Despite me chasing them again, the VAT reclaim still hasn't materialised. Legally, am I permitted to just ignore the VAT on that one invoice or am I obliged to charge VAT given that I'm VAT-registered?

Expert’s Answer:If you are VAT-registered, VAT must be accounted for to HM Revenue & Customs (HMRC) irrespective of whether the customer actually pays the VAT charged on the invoices issued. 

Clearly if a business is VAT-registered it is commercially better to charge VAT on the supplies rather than treat them as VAT inclusive.

A business that is on Flat Rate Scheme (FRS) is VAT registered and must issue invoices plus VAT at the appropriate rate. When accounting to HMRC under this scheme, however, the gross VAT inclusive figure is used and the FRS percentage applied. This is the VAT that is declared and paid to HMRC.

Furthermore the use of the Cash Accounting scheme allows tax payers to declare and pay the VAT charged when payment is received rather than when the invoice is issued.

Unfortunately you cannot ignore the unpaid VAT. You must, if on the Cash Accounting scheme, treat the payment as VAT inclusive and extract the VAT or apply the FRS percentage to the payment received.

If not on the Cash accounting scheme, the VAT charged on the invoice must be declared or the FRS percentage applied to the total invoice price and declared. There would the ability to claim Bad Debt relief if the outstanding amount is not paid after six months.

The expert was John Crawford, managing director of the VAT Consultancy.

Friday 4th March 2011