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HMRC internal manual

VAT Refunds Manual

Time limits: VAT Regulations 1995

Regulation 29

This provides that input tax must be deducted in the return for the accounting period in which the entitlement to deduct it arose.

The entitlement to make a claim to deduct input tax arises in the accounting period in which the taxable person has both incurred the input tax and received the documentary evidence, for example, the VAT invoice, to support its deduction.

The taxable person has four years from the due date of the return for the accounting period in which the entitlement to make the claim to deduct arose in which to make a late claim for input tax.

For example: Ali Ltd is accounting for VAT in accounting periods ending 31 March, 30 June, 30 September and 31 December. It incurs input tax on the purchase of a crate of widgets on 25 January 2015. It gets the VAT invoice on 21 April 2015. The entitlement to deduct the input tax has arisen in the accounting period ending on 30 June 2015 and the due date for the return for that accounting period is 31 July 2015. Thus Ali Ltd has until 31 July 2019 to claim that input tax.

Regulation 38

There is no time limit in Regulation 38 itself because there can be no limit imposed on the time that passes between the date on which a supply is made and the date on which the consideration for it can be changed. However, there is a limit on the time within which the failure to reflect a change in consideration can be corrected.

That time limit is imposed by Section 80(4) of the VAT Act 1994 and regulation 34(1A) of the VAT Regulations 1995.

Regulation 38 requires that, where the consideration for a supply is increased or reduced after the supply was made and VAT accounted for on the original consideration, the person who made the supply must issue debit notes or credit notes, as appropriate, to the customer and reflect the change in consideration in the VAT return for the accounting period in which the increase or reduction was given effect in the business accounts.

If the supplier fails to make the adjustment in the appropriate vat return, that return contains an error in that he has either over-declared or under-declared his true output tax liability.

For example: Ali Ltd supplies televisions to the general public. In 2007, as a sales promotion campaign, it sells its televisions at £100 each (of which £16.66 is output tax) but undertakes to refund £50 to the buyer if he comes back in ten years’ time with his receipt. Mr Banda returns to the shop on 21 June 2017 with his receipt and Ali Ltd pays him his £50. Ali Ltd is now required to reduce its output tax liability in the return for the quarter ending on 30 June 2017 by £8.33. If it doesn’t, that return contains an over-declaration of output tax and is ‘in error’. The remedy is for the company to make a claim under Section 80 of the VAT Act 1994 to recover it - see the decision of the VAT & Duties Tribunal in CRC –v- Iveco Ltd [2016] STC 1754, paragraphs 39 and following.

If the consideration is increased and the company fails to make the adjustment in the VAT return, the result will be that the return contains an under-declaration of output tax and we will be entitled to make an assessment under Section 73 of the VAT Act 1994 to recover that under-declared output tax.

Regulation 111

Pre-registration input tax

Regulation 111 gives the Commissioners discretion to allow businesses to deduct as input tax VAT incurred before registration.

There are two time limits:

  • Tax on goods on hand at registration cannot be deducted if it was incurred more than four years before the effective date of registration. This includes VAT incurred on services performed on these goods.
  • The deduction of input tax on services bought in prior to registration for VAT is limited to those services bought in less than six months before the trader’s effective date of registration.

A trader must claim any pre-registration input tax on the first return they are required to make. If he does not, he has four years from the date on which he was required to submit that first return in which to claim it.

Post-deregistration input tax

Regulation 111 gives the Commissioners discretion to allow businesses to claim input tax incurred on services after deregistration, provided the services relate to the taxable business which was carried on before deregistration, see VIT32000. Such services might include, for example, solicitors’ or accountants’ services.

However, that tax cannot be reclaimed more than four years after it was incurred.

Any such deduction will be subject to any partial exemption calculations the trader was operating before deregistration.

Regulation 115

Regulation 115 is one of the provisions covering the capital goods scheme (CGS).

It deals with the method of adjustment and applies to ‘subsequent’ intervals (input tax deduction in the first interval is dealt with under the normal partial exemption rules). In this regulation a taxable person making an adjustment in respect of a subsequent interval does so on a specific return (the ‘specified’ return).

The specified return is the return for the second prescribed accounting period after the interval to which that amount relates, unless the Commissioners allow another return to be used - see the VAT Partial Exemption Guidance for guidance on the operation of the CGS.

In theory the Commissioners could allow any return to be used for this purpose. Regulation 115(8) restricts that discretion so that the Commissioners can only allow a return other than the specified return to be used, if it is the return for a prescribed accounting period commencing within four years of the end of the accounting period to which the specified return relates.

Thus, if a trader fails to make a CGS adjustment at the right time (on the specified return), the Commissioners would only allow him to use a subsequent return to make the adjustment if it is made within four years of the end of the accounting period in which the adjustment should have been made.

Normally, we only allow a return other than the specified return to be used in cases where the taxable person is unable, for some accounting reason, to use the specified return - for guidance on this see the VAT Partial Exemption Guidance.

Regulation 165A

Section 36 of the VAT Act 1994 allows businesses to recover amounts declared as output tax on supplies for which they have not been paid or have been paid only in part. This is known as bad debt relief.

Claims for bad debt relief can be made once six months have passed since the later of

  • the date the consideration for the supply was due and payable, or
  • the time of supply.

However, claims cannot be made later than four years and six months after the later of the two dates mentioned above.

For example: Aiya Ltd makes a supply on 25 January 2016 and the consideration falls due on 14 February. If the consideration has not been paid by 14 August 2016 and the supply falls within the bad debt provisions, the business will have until 14 August 2020 to make the claim for relief.

You will find more information on the operation of the relief in the VAT Bad Debt Relief manual.