1 July 2014

VAT Clawback example on Unpaid purchase invoices - implications for all VAT registered companies

Unpaid purchases VAT

Many people are still not aware of the New VAT Treatment of unpaid purchase invoices - From Finance (No 2) Act 2013 signed into law on 18 December 2013:

It makes VAT more complicated, and marks a real change in how many companies operate and may affect large numbers of SME's operating VAT on the cash receipts or invoice basis:

What happens is, If a purchases invoice remains unpaid more than six months after the VAT period in which the supply took place, the taxpayer must make a VAT adjustment effectively repaying that VAT claimed. 

If the invoice is later paid after the six months, the “adjusted” VAT can then be claimed again, so companies cannot get excessive cash flow benefit to purchase VAT on the cash receipts basis.
Effective Date

This change is effective from 01/01/2014 and it has big implications for cash strapped companies struggling to pay creditors.

The new rule in the finance act that - If purchase invoices are not paid within six months , the VAT claimed has to be repaid could lead to some issues for example:

Interest and penalties for not adding back purchase VAT claimed but the supplier invoice not paid in less than six months.

Mistakes on VAT returns and having to manually edit VAT returns (as far as we know, no software vendors have added the ability to add back this vat automatically to VAT reports).

Are your at risk?

To see what level of exposure your company has to this change, we would normally start off by reviewing the aged creditors listing, to see if there are unpaid creditors over six months (something more normal unfortunately in the recession), and to check at what VAT rate and total value of VAT claimed on those invoices.

This will give a value of VAT you would have to add back on your next VAT 3.

Timeline and example

While this change was commenced in January 2014 and if applied retrospectively would mean that some companies might owe the Revenue a significant amount depending on the correct Aged Creditors figure (and these business owners may not be expecting the strain on their cash flow), thankfully the feedback we received from Revenue* suggests that this change won't be applied retrospectively, so it will apply to invoices received received after 1st January 2014.

A simple example as follows assuming no VAT on Sales.

An invoice received on the 01st January 2014, for €1230 gross at 23% VAT.(Net €1000 + VAT of €230)

January - February 2014 VAT 3 (due 19th of March)

VAT on Sales T1             €0

Vat on Purchases T2      €230

VAT REFUND:                €230

If the invoice was unpaid by 30th June 2014,

May - June VAT 3 (due 19th of July)

Vat on Sales T1               €230

Vat on Purchases T2         €0

VAT PAYMENT:               €230

The 230 of VAT on the purchase invoice that was not paid within six months, gets paid back to the Revenue in the May-June VAT return.

Vat desk audits

We are receiving letters from Revenue to our clients more frequently for VAT desk audits, looking for the purchases/sales ledger and copies of large invoices and this issue will become more of an issue from June 2014 onwards.


*Feed back received from Revenue was from a Vat inspector in the South city/ Dun Laoghaire-rathdown Revenue district and not confirmed in writing so ask Revenue directly to confirm if you think this is an issue for you..

**Please see Section 62A Vat consolidation Act for further information.

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