We had our first VAT inspection in the autumn of 2004. Being present at a VAT inspection is a bit like a Quality Assurance review – be compliant and courteous, but never offer more than is asked for.

During this review we reached a conclusion with our inspector that there wasn’t any VAT chargeable on the provision of software licenses to one of our European customers. Consequently, we invoice them without VAT because it’s considered a service rather than goods. However, we purchase these software licenses from a company in the UK. This means we have to pay VAT and then claim it back from HM Revenue & Customs.

Things get stranger still: we make our VAT return on a quarterly basis, based on purchases made and invoices raised. It’s possible, depending on the time that a purchase is made, that we get money back from invoices we’ve not paid, and indeed, from invoices that our clients have not yet paid. Our suppliers have their own payment schedules to HM Revenue & Customs.

Given that we’re VAT registered and our larger customers are VAT registered, surely it would be easier for all concerned not to have to include VAT on transactions between two UK VAT registered companies? I don’t know why this isn’t implemented. It’s a legal requirement to include VAT information on invoices, therefore providing an opportunity for checking at the time of an inspection.