Deposits and liquidation – caveat emptor when it comes to VAT
Deposits, VAT, and Supplier Liquidation
When a business pays a deposit for goods or services, a VAT point is usually created, meaning VAT must be accounted for at that stage. However, complications arise if the supplier goes into liquidation and the goods or services are never delivered.
In such cases, HMRC deems that no supply has taken place, meaning VAT cannot be reclaimed on the deposit. This can be particularly problematic for businesses that pay large deposits in advance.
Why VAT on Deposits Cannot Be Reclaimed
Under VAT rules, VAT is only reclaimable when there has been a supply of goods or services. If a supplier goes into liquidation before delivering, no taxable supply occurs, meaning VAT cannot be recovered.
This differs from a standard bad debt relief claim, where a business has made a sale and later fails to receive payment. With deposits, the VAT is linked directly to the supply, so no supply equals no VAT recovery.
Businesses must therefore be cautious when paying substantial deposits, especially to suppliers in financially unstable positions.
Minimising Risk When Paying Deposits
To reduce the risk of losing VAT on deposits, businesses should:
- Assess supplier stability before paying large deposits.
- Negotiate payment terms that delay VAT charges until delivery.
- Consider credit insurance to protect against supplier insolvency.
Being proactive can help businesses avoid financial losses when dealing with deposits and liquidation.
How We Can Help
At Lewis Brownlee, we offer expert guidance on VAT on deposits and liquidation to help businesses manage risk and tax exposure effectively.
We provide a free introductory meeting to discuss your VAT concerns and ensure you have a strategic plan in place.
Help is at hand! Contact us today for professional VAT advice.
Understanding VAT on deposits and liquidation is essential for businesses making advance payments. Proper planning can help avoid financial losses and VAT complications.