In order to reclaim VAT on its costs, a business needs to consider a number of points;
1. Has it got a VAT invoice from the supplier, and
2. Has it used the cost to make VATable supplies, and
3. Was it charged the correct amount of VAT by the supplier?
Most businesses will be aware of point 1 and most will understand point 2. However, it is common for businesses to assume that if they are charged VAT then they can claim it from HMRC without taking into account if the rate applied by the supplier is correct.
For most businesses this will not be an issue. However, for those in the building and construction industry and financial service sector this can be a real problem. It is surprisingly common for suppliers to invoice building services that are either VAT free (zero rated), reduced rate (5%) rather than at the standard 20% rate of VAT.
If the wrong amount or wrong rate of VAT is charged in error e.g. standard rate rather than reduced rate, then HMRC do not view the amount charged as input VAT. It is an error on the part of the supplier and the VAT cannot be claimed as input VAT by the recipient.
This means that HMRC can and will block input VAT claimed in these circumstances. HMRC can keep the over declared VAT as a crown debt due to HMRC, but at the same time assess for over claimed input VAT and apply penalties of up to 100% of the VAT.
Where the supplier has been self-billed with the wrong rate of VAT applied, it can lead to the supplier over declaring VAT and the self-biller over claiming input VAT. In this case given that the supplier has generated their own over claim of VAT HMRC are more likely to apply a higher level of penalties if the issue is noted during a VAT visit.
If you or your clients are involved in the building sector, self-billing or making a claim for VAT under the DIY House Builders scheme it would be worth checking that VAT is not being over charged on purchases that may qualify to be supplied at either the zero or reduced rate of VAT. It is also worth ensuring that invoices issued do not misstate the VAT due as this can result in a loss of VAT recovery to clients and a breakdown in the business relationship.