How to properly recover VAT on expenditure

VAT Registered businesses have a right to reclaim the VAT that they incur on their expenditure to the extent that it relates to their taxable business activities.

However, HMRC has always sought to deny VAT recovery in instances where sufficient evidence has not been retained in respect of such expenditure.  

Further, there has been a rise in cases where HMRC has argued that VAT cannot be recovered because the transactions relate to fraudulent transactions. 

In these cases, genuine businesses have bought goods and services that a supplier has suggested that they purchase and sell on.

HMRC has argued that these genuine businesses have been involved in deals that “look too good to be true” and it “should have been clear to them” that they were, in fact, part of a fraudulent chain of transactions even if the business itself did not have a fraudulent intention.

Where HMRC seek to deny the recovery of VAT, this can lead to hefty penalties and interest charges along with potentially increased scrutiny. Clearly, where a business has been shown to be involved in a fraudulent chain of transactions there is also the chance of a reputational risk.

Help ensure your business can recover the VAT on its expenditure

  1. Conduct due diligence – Always verify the VAT registration and reputation of suppliers and partners to ensure they are legitimate.
  2. Monitor transactions – Regularly review transactions for irregularities or signs of fraud to catch issues early.
  3. Educate your team – Train your finance and procurement teams on the risks of VAT fraud, ensuring they can spot warning signs.  They should also be aware of the evidence that needs to be retained to support VAT Recovery.
  4. Maintain clear records – Keep thorough documentation of all transactions as evidence of your due diligence.
  5. Consult professionals – Seek advice from VAT specialists to navigate complex regulations and strengthen your compliance. Particularly if the expenditure only partly relates to a taxable business activity.

By implementing these steps, your business should avoid costly fines, penalties, and reputational damage.

For tailored guidance on VAT matters, please contact our specialist VAT team.

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