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Watch out for VAT on aged creditors over six months.

Jul 31, 2013     tags: bookkeeping

A common oversight in accounting for VAT is to forget (or even to be unaware) that input tax claimed on purchases must be repaid to HMRC on any purchase invoice that remain unpaid for longer than 6 months from the date it became due. This specific regulation covered by Statutory Instrument 2002 No 3027 Part XIXB.

The logistics are better illustrated by way of example as follows:

“Capslock Limited” the customer, buys a supply of services from “Page Partners LLP”. The invoice from Page to Capslock is dated 01 April, with 30 day credit terms. Hence the invoice becomes payable on 1 May. If Capslock have still not paid any part of that invoice by 1 November (six months after the payable date), then Capslock must make a reversing entry in the input tax line of its VAT account equivalent to that amount of VAT on the unpaid sum. Hence, if the amount of the unpaid invoice was £600 (inc. VAT), then input tax of £100 (assuming VAT rate of 20%) must be adjusted back on the VAT return and be repaid to HMRC.

This is, by all accounts, a fairly common issue as many bookkeeping practitioners (and maybe even some accountants) it seems are unaware of the legislation and HMRC can levy penalties on amounts that have not been repaid that should have been.

Most if not all of the mainstream bookkeeping and accounting packages do not seem to provide any facility to flag such invoices that would prompt the bookkeeper to make the appropriate adjustment. Sage, I have noticed, at least has a report that one can run to assist with identifying such amounts: however, one would need to be aware of the issue to know to run the report in the first place.

The bookkeeper should then adopt, as part of their regular VAT running process, a step to identify any purchase invoices (either wholly or partially) that have remained unpaid for more than 6 months after the due date. Once these have been identified, then I would suggest the first step is to check with the appropriate party as to whether credit terms have been extended and if they have documentary evidence secured as to the revised due date. Providing the new due date is no older than 6 months, then the input tax can remain (until such time as the new due date expires of course).

Otherwise, the amount should be reversed and the input tax deducted. I.e. debit the trade creditor account with the total amount unpaid including VAT; credit the nominal expense account with the amount excluding VAT and credit the VAT control account with appropriate amount of VAT.

Note that, of course, this is only an issue for those who account for VAT on the standard/accrual basis. Cash accounting for VAT avoids this problem (although it can create others and is not available to all VAT registered entities).

Phil Cockayne BA(Hons) ICPA MIoD AICB CB.Cert
July 2011