VAT on interst on overdue debts
Discussion
Are you sure thay cannot recover VAT?
I bet they are VAT registered but they may have problems recovering all their Input VAT due to the Partial Exemption rules.
The VAT you charge your customers is based on the VAT rules relating to what YOU are supplying, not the basis on whether your customer can or cannot recover it.
And as it is a government agency who seem to be the culprits - stuff it - just go ahead and whack them with as much VAT as you can.
I bet they are VAT registered but they may have problems recovering all their Input VAT due to the Partial Exemption rules.
The VAT you charge your customers is based on the VAT rules relating to what YOU are supplying, not the basis on whether your customer can or cannot recover it.
And as it is a government agency who seem to be the culprits - stuff it - just go ahead and whack them with as much VAT as you can.
You may be correct - but the question is, if no VAT is charged, is that because it is Zero, Exempt or Outside the Scope?
A few minutes Googling indicates the following -
The interest is charged to the defaulting customer on the VAT Inclusive Value of the debt
There is no VAT charged on the interest
The interest is treated as a VAT Exempt supply
Be aware that generating Exempt Supplies can restrict the amount of Input VAT you reclaim on your costs, although I would expect that interest charges to defaulting customers would never generate enough Exempt Supplies to take you above the Partial Exemption de minimus levels.
One scenario where things would be different would be when the business operates the VAT Flat Rate Scheme.
If the business charging the interest is on the VAT Flat Rate Scheme, then Outoput VAT at the correct Flat Rate Percentage should be charged on the interest.
A few minutes Googling indicates the following -
The interest is charged to the defaulting customer on the VAT Inclusive Value of the debt
There is no VAT charged on the interest
The interest is treated as a VAT Exempt supply
Be aware that generating Exempt Supplies can restrict the amount of Input VAT you reclaim on your costs, although I would expect that interest charges to defaulting customers would never generate enough Exempt Supplies to take you above the Partial Exemption de minimus levels.
One scenario where things would be different would be when the business operates the VAT Flat Rate Scheme.
If the business charging the interest is on the VAT Flat Rate Scheme, then Outoput VAT at the correct Flat Rate Percentage should be charged on the interest.
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