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Tottel's VAT Annual 2006/07 by A St John Price

John Price, author of ‘Tottel’s VAT Annual 2006/07’, considers an often-asked VAT question.

Introduction

This article explains the information which must be shown on a tax invoice, together with various other points about them. In theory, tax invoices, which are mostly produced by computer nowadays, should all comply with the law and should be easily recognisable. In practice, the infinite variety of layout on invoices complicates matters.

If your business receives a substantial volume of invoices, you are bound to be at risk for amounts big enough to lead to possible penalties. The sheer volume of transactions means there is a risk of documents slipping through, which are not tax invoices. To reduce the risk to a minimum, both managers approving invoices and clerks processing them through the accounting system, must understand the importance of a tax invoice and the details which it must contain. That requires training, which is not easy to carry out systematically, especially if there is a turnover of staff. Yet, untrained staff will break the law in your name!

So do I have to worry about my input invoices?

Yes, you do! If your staff are not trained in what is required on a VAT invoice and you do not have a good enough system for checking for the key information, you are at risk; it is inevitable that VAT will be recovered on some documents which do not qualify. When did you last check your input invoice files for:

● supplier’s statements which sometimes show VAT?

● delivery notes, which are sometimes carbon copies of the invoice and could easily therefore show the VAT number if not the actual sum of VAT?

● requests for payment which often contain either the VAT number or the amount of VAT?

● pro forma invoices which may look much the same as an ordinary invoice?

HMRC will certainly disallow input tax claimed on the basis of such documents even if they take a more relaxed view on those which fail to state, for example, the type of sale; ie whether it is a sale, a lease, on hire-purchase or whatever.

This does not mean that you have to check every input invoice for every detail — though, if you wanted to delay payment, a blitz on them might well produce a substantial number with minor defects. However, staff do need to confirm that:

● the document is a tax invoice; and

● the VAT is being recovered in the correct period.

You cannot recover on a VAT return for the period ended 30 April the VAT on an invoice dated 1 May!

Do not invent VAT!

If a supplier sends you an invoice on which the VAT is incorrectly calculated, do not alter it! If you do, you cannot then prove to HMRC that the supplier has also corrected it. Strictly speaking, a document, which does not show the right amount of VAT, is not a tax invoice and HMRC could therefore disallow the lot. So if the sum matters, return it to the supplier for correction. If the amount of the error is trivial, you may decide to ignore it — though requiring the supplier to correct it is an excuse for delaying payment.

Information required on a VAT invoice

A VAT invoice must show (Reg 14):

● an identifying number;

● the time of the supply;

● the date of the issue of the document;

● name, address and registration number of the supplier;

● the name and address of the person to whom the goods or services are supplied;

● a description sufficient to identify the goods or services supplied;

● for each description, the quantity of the goods or the extent of the services,the unit price, the rate of VAT and amount payable, excluding VAT, expressed inany currency. The unit price for services can be an hourly rate or a standard price. If the supply cannot be analysed, the total price is the unit rate. HMRC accept that the unit price need not be shown at all if it is not normally stated in a particular business sector and it is not required by the customer (Notice 700 Para 16.3.2 as updated February 2004);

● the gross total amount payable, excluding VAT, expressed in any currency;

● the rate of any cash discount offered;

● the total amount of VAT chargeable, expressed in sterling (as a note if the invoice is in a foreign currency).

In theory, the rules are strict. If an invoice does not contain one or more of the above pieces of information, it does not qualify as the basis for recovering input tax. This was demonstrated in ABB Power Ltd (MAN/91/201 No 9373) where the Tribunal held that a document was not a tax invoice because it did not showthe:

● type of supply — sale, hire-purchase, rental etc (no longer required);

● correct tax point;

● rate of tax applicable.

The ABB argument was in fact about HMRC’ right to demand output tax on a document issued by ABB. However, if HMRC cannot collect output tax in such a case, what do you suppose they will do? It stands to reason, that they will deny input tax to the recipient.

In practice, if a document is obviously intended to be a VAT invoice, HMRC are unlikely to use minor deficiencies in it as a reason for disallowing input tax unless they have been unable to collect the output tax. However, they do insist on the key details, such as the name, address and VAT number of the supplier, enough information about the supply to identify it as something bought for the purposes of the business and the amount of VAT.

Invoicing in a foreign currency

You can invoice in any currency you wish but the document must also state the sterling equivalent for the VAT charged so as to ensure that a UK customer reclaims the same sum as you account for as output tax.

Foreign currency conversions

You can convert foreign currency at either:

● the market selling rate in the UK at the time of the acquisition. The rates published in national newspapers are acceptable; or

● the period rate of exchange published by HMRC and available from the National Advisory Service (see Contacting HMRC at the start of the book); or

● at a rate agreed with your local VAT office. See para 5.5 of Notice 725 The Single Market for more details.

You can use a mix of the first two options for different kinds of transaction provided you note in your records the kinds to which each applies. If you then wish to change this mix, you must ask HMRC.

Credit notes to customers in other Member States

Credit notes to customers in other Member States must show the same details as are required on a VAT invoice. However, HMRC have not changed the existing rules for credit notes issued to UK customers.

Less detailed invoices

Retailers are allowed to issue less detailed invoices up to £250 (£100 up to 1/1/04) (Reg 16). Although certain information such as the name of the customer and the amount of VAT is not required, these still have to show key details such as the name and address of the supplier, the nature of the goods supplied and the rate of VAT applicable.

Petrol filling station receipts are the most common example of a less detailed invoice, which is used for VAT recovery. Credit card slips do not usually contain the right details, although the slips produced by modern tills often do.

No invoice is required for (Notice 700 (April 2002), para 19.7.5):

● telephone calls;

● coin operated machines;

● car park charges — except on-street meters;

● toll charges;

● petrol element of mileage allowances to staff. Notice 700/64/96 (January 2002), para 8.7 says nothing about invoices but, presumably, the statement in the 1996 version remains valid.

For the first four, the value limit is £25 and the supplier must be VAT-registered.

These are concessions by HMRC. No excuses are accepted in other cases because of the problem of whether the supplier is registered. That apart, the rule is no tax invoice, no VAT recovery!

Must the tax invoice be in my name?

A tax invoice is supposed to show the person to whom the goods or services are supplied. So, if an invoice is not in your name, it usually means that the supply was not to you. In principle therefore, you should not recover VAT on invoices in the name of third parties. HMRC will sometimes allow this in circumstances in which they are sure that there was a supply made to the person claiming the input VAT and that that VAT has not already been claimed by the party to which the invoice was addressed.

However, it is far better to obtain an invoice in the right name in the first place. The one common exception to that requirement is expenses incurred by employees. Whilst it is always a good idea to obtain an invoice addressed to the employer if possible for, say, hotel accommodation, HMRC do not insist on this. Naturally, the travel must be on business.
When part of an expense, such as business calls on a private telephone bill, is paid by an employer, HMRC will allow recovery of the appropriate proportion of VAT provided, of course, that you obtain a copy of the bill in question.

What if I fail to get a tax invoice?

HMRC are likely to disallow input tax for which a VAT invoice is missing. Usually, the solution is to ask the supplier for one or for a copy if the original has been lost and, for routine transactions, HMRC are likely to insist on this.

For further comment, see Chapter 13, What Can I Recover Input Tax on? under the heading Cases where recovery has been allowed without a tax invoice.

The extent to which your business is at risk for failure to obtain tax invoices must depend upon how many suppliers it has, whether it deals with relatively few of them frequently or infrequently, with a large number of different ones and soon.

HMRC have power to allow electronic invoicing, which assists those suppliers whose systems are closely integrated with those of customers. The rules have been around since long before the internet, although no doubt this is encouraging the transmission of documentation electronically. If you just use the internet instead of the post and you print the invoices from your suppliers off your computer, HMRC may, in theory, have little concern. However, it might be wise to discuss the matter with them if only because of the risk that two copies of the document might be printed, without this being apparent. See the comments below from the supplier’s point of view.

Issuing tax invoices electronically

HMRC allow unsigned fax or e-mail invoices.

For real electronic invoicing, see the criteria required by HMRC in Notice 700/63 Electronic invoicing. If you start to invoice electronically, you must tell HMRC within 30 days.

Systems for invoicing with a computer range from merely producing the document, which is sent by post, to a full-blown electronic data interchange system, known as EDI. Before installing the latter, you must get approval from HMRC. It is wise in any case to consult them when developing a new computer system of any kind because they may have useful comments to make about its design, quite apart from the risk that you fail to take care of some VATpoint.

One point to consider is the control on duplicate invoices. Cheap modern printers mean that it is possible to print off a copy of an invoice without there being any indication that it is a copy. When planning a computer specification consider a requirement that the second or subsequent copies of a document are overprinted stating that they are a copy with the date of printing.

Self-billing

Self-billing is the system under which the customer produces the supplier’s tax invoice, though the latter remains liable for the output tax. It is used in such circumstances as:

● construction sites where the site staff employed by the main contractor are better equipped to produce tax invoices than the subcontractors working on site;

● royalties paid by a publisher to an author. The author does not know what is due until told by the publisher.

Dangers of self-billing

The pitfall of self-billing is that, if you, the customer, do not do it properly, HMRC may either disallow the input tax, which you have invoiced to yourself from your supplier or may demand from you extra VAT if the value was too low. Moreover, your supplier must accept your document and must not issue an ordinary tax invoice.

The rules you must meet are in Reg 13 and in Notice 700/62 Self-billing, which contains further legal requirements. Key points include that:

● self-billed invoices must contain the details required on an ordinary tax invoice and state The VAT shown is your output tax due to HMRC;

● a written agreement is required — see below and both parties must keep a copy;

● the customer must keep a list of the addresses and VAT numbers of the suppliers, who have agreed to self-billing — available to HMRC on request.

A self-billing agreement must:

● be for a specified period not exceeding 12 months or, alternatively, the period of contract for the supplies in question;

● commit the supplier to accept the self-billed invoices and not to issue VAT invoices for supplies to that customer;

● require the supplier to notify the customer on ceasing to be a taxable person or on changing its registration number.

Moreover, that agreement ceases automatically if:

● the business of either party is transferred as a going concern;

● the supplier deregisters;

● the supplier’s VAT registration number changes.

See Notice 700/62 for a draft agreement. There is a pitfall in it over the requirement that the supplier accepts self-billing for all supplies. I suspect that this tends to be disregarded in large companies. Suppose a supplier makes a variety of supplies to different parts of a large business; it may be natural to accept self-billed invoices for certain kinds of supply because the quantities are known first to the customer and the price per item is prearranged. However, other supplies may be at varying prices and self-billing may be inconvenient to both sides — in contrast to royalties, construction work and scrap removal where the customer automatically knows both what is payable and that there is a need to self-bill.

For instance, suppose the supplier is receiving royalties but is also doing consultancy work for the customer. It is not natural then for the supplier to have to tell the customer to produce a self-billed invoice for each consultancy payment!

Authenticated receipts

Reg 13(4) permits an authenticated receipt to be issued by the customer when paying a person supplying construction services. It then substitutes for a tax invoice:

● the authenticated receipt must show all the details required of a tax invoice;

● reclaim the input tax when you pay the supplier but get back from the latter the authenticated receipt duly signed;

● if the supplier fails to co-operate, contact your local VAT office.

Can I recover VAT shown on an invoice from a supplier in another EU State?

The answer is obvious when you think about it. UK HMRC cannot be expected to allow you to recover, say, French VAT at a rate different to our own when they havenot collected the output tax from the French supplier.

There is a system under which, in limited circumstances, you can reclaim VAT incurred in another Member State under the EC 8th VAT Directive. See Chapter 27 on Recovery of Foreign VAT: the 8th and 13th Directives.

A St John Price FCA
July 2006

A St John Price FCA is author of ‘Tottel’s VAT Annual 2006-07’, from which the above article is extracted. The book is part of ‘Tottel’s Core Tax Annuals 2006-07’. The series is due to be launched in September 2006. Each of the new Core Tax Annuals costs just £19.95, or all six cost just £99.50! The Core Set comprises:

Tottel's Corporation Tax 2006-07;

Tottel's Capital Gains Tax 2006-07;

Tottel's Income Tax 2006-07;

Tottel's Inheritance Tax 2006-07;

Tottel's Trusts and Estates 2006-07; and

Tottel's Value Added Tax 2006-07.

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