Tax tip: VAT on a supplier invoice

This tip is relevant to all businesses that pay for goods or services that qualify for exemption from VAT or a rate of VAT lower than the standard rate. This tip is also relevant to businesses that make such supplies. Charging too much VAT can be commercially damaging.

When arranging for supplier invoices to be paid do not assume the amount of VAT on the invoice is correct. For example a property developer may receive invoices from a building contractor with VAT calculated at the rate of 20%. Whether this is the correct rate of VAT depends on the nature of the work. If the invoice shows VAT charged at 20% and the correct rate is 5% or the zero rate HMRC can refuse recovery of the excessively charged amount.

An excessively charged amount of VAT is strictly speaking not VAT. The VAT legislation does...