VAT Treatment of Unpaid Purchase Invoices

  • Budget 2014 brought in new rules with regards to the VAT treatment of unpaid purchase invoices. From 1st January 2014 a person that does not pay their suppliers within 6 months will be required to repay the VAT previously reclaimed. A taxpayer will need to consider this in their July/August VAT return for the first time.
  • If a person deducts VAT in a taxable period but does not pay the supplier for the goods or services within 6 months of the end of that period, then an adjustment will be required in the VAT return. The amount deducted will be reduced by the amount of VAT relating to the unpaid consideration.
  • A re-adjustment is provided for in the event of subsequent payment or part payment for the goods or services.
  • A taxpayer can avoid being subject to a VAT clawback if they can prove that there is reasonable grounds for not paying the consideration. However, Revenue have stipulated that an inability to pay is not reasonable grounds to avoid one.
  • Revenue may consider extended credit terms or a dispute as reasonable grounds. However, if that’s the case it would be advisable to seek an advanced option from Revenue.

Example

Sports Ltd purchases 1,000 Irish rugby jerseys from Puma in January 2014 for €5,000+VAT €1,150. Sports Ltd reclaimed the purchases VAT of €1,150 in its January/February VAT return. Due to financial difficulties Sports Ltd was unable to pay Puma. As the purchase invoice remained unpaid for more than six months, after the VAT period in which the supply took place, Sports Ltd must make a VAT adjustment in its July/August return and repay the VAT claimed. If the invoice is later paid by Sports Ltd, the “adjusted” VAT can then be claimed.

This could potentially affect a large amount of companies who have avoided raising credit notes against invoices that they know will never be paid. If you wish to discuss this new piece of legislation and how it will affect you please do not hesitate to contact us on 01-2804731 or email info@hsoc.ie