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Procure to pay (part 4)

Updated 25 September 2024

Read purpose, scope and audience (part 1) and general approach to VAT compliance controls (part 2) of Help with VAT compliance controls — Guidelines for Compliance GfC8, if you have not already.

The overall control objective of Procure-to-Pay (P2P) is the timely, complete and accurate recording of transactions and payments received.

From a VAT perspective, minimising the risk of error and delays in this process ensures the right input tax is claimed at the right time, and therefore, transactions are made available for reporting through the correct VAT Registration and VAT Return period.

The extent to which the P2P process is used may be determined by the systems in place and the business model. For example, businesses selling goods may operate the P2P process to a greater extent than businesses that only sell services. However, there are controls outlined in this section that can be adopted in both cases.

P2P represents the typical set of business functions used to manage Business-to-Business (B2B) purchasing processes, from requisition and purchase order, receipt of goods or services, purchase invoice, supplier payment and recording transactions in financial accounts.

Transactions should complete the full P2P cycle from source document to the general ledger. Larger organisations with ERP systems should work towards fully automating the workflow as far as possible and manual overrides of application determined values should be subject to tolerance limits and approval controls.

Purchase order

Initiation of purchases is often the result of a contract to supply services, stock or consumable items. Engaging new suppliers or new requests for products or services should go through an approval process with appropriate segregation of duties. Purchase Orders (POs) are then raised and issued to the supplier. Sales Orders or similar documents are issued by the supplier to acknowledge receipt.

Businesses often have a spend limit that triggers the need for a PO and small expenses and recurring items such as professional fees, utilities and building leases are often processed without POs.

Control points

1. POs are placed only for approved requisitions.
2. POs are accurately recorded.
3. POs are created prior to receipt of supplies and invoice processing.
4. Changes to post-receipt of supplies or invoice receipt are either blocked or tracked.

Receipt of supply

In a typical P2P process, a Goods Received Note (GRN) is raised on receipt of goods delivered by the supplier. This internal document verifies the goods are in order (or will notify any discrepancies) and is sent to the accounts payable team.

This process will differ in the case of receipt of services where contracts are often an important aspect of determining service fulfilment.

Control points

1. Supplies are received and accepted only if they have valid POs.
2. Supplies received are recorded accurately.
3. Changes to GRN records post-invoice are either blocked or tracked.

Tax invoice

Accounts Payable (AP) receive and process supplier invoices. A key control here is the two-way match between the PO and invoice, or even a three-way match including the GRN. For non-PO purchases, such as utilities or rent, the contract terms are matched against invoices received. A clear process and escalation route should be in place to deal with tax code queries.

Control points

1. Postings to accounts payable represent goods or services received.
2. An invoice is recorded only once.
3. Invoices are recorded against the correct organisational unit.
4. Invoices are recorded for reporting in the correct VAT period.
5. Input tax recorded for recovery is supported by required evidence.
6. Input tax recorded for recovery is for a business purpose and is attributable to taxable supplies made, subject to applicable recovery rules.
7. Invoices comply with VAT Regulations 1995 Part 3 invoicing requirements.
8. The sterling VAT value shown on the invoice is the value recorded (subject to restriction or later adjustment where appropriate).
9. VAT codes allocated accurately reflect the tax treatment of purchases.
10. AP staff have the appropriate VAT knowledge to allow them to accurately post transactions against the correct tax codes.
11. Where possible, tax code allocation is automatic.

Credit notes and adjustments

The receipt of a purchase credit note (or credit memo) notifies the return or offset of funds in the event of cancellation, goods returns, accounting error or agreed price reduction. Tax amounts included on a purchase credit note will reduce the total input VAT claimable in an accounting period.

A supplier may issue a sales debit note to reflect an increase in price, and tax amounts included on a debit note will increase the total input VAT claimable in an accounting period.

Control points

1. All valid credit and debit notes and other adjustments related to accounts payable are input and processed.
2. Credit and debit notes and adjustments are accurately recorded.
3. The VAT on credit notes should not exceed the VAT on the corresponding original invoice.
4. Credit and debit notes and adjustments are recorded against the correct organisation unit.
5. Credit and debit notes and adjustments are recorded for reporting in the correct VAT period.

Supplier payment

Receipt and posting of purchase invoices initiates the supplier payment process, usually through automated bank runs.

Control points

1. Payments are made only for goods and services received, based on accepted credit limits.
2. Payments are distributed to the appropriate suppliers.
3. Payments are accurately calculated and recorded, for example reconciling supplier statements.
4. Valid invoices are paid within six months of the payment due date, and a Bad Debt Relief adjustment instigated for unpaid invoices, where the necessary conditions are met.
5. Early settlement discount (prompt payment discount) tax adjustments are accurately calculated and recorded.
6. Accounts payable are adjusted only for valid reasons and an audit trail kept where any changes are made.

For more information on bad debt relief read Relief from VAT on bad debts (VAT Notice 700/18).

Receipt of reverse charge supplies

For cross-border trade, a reverse charge applies to most B2B taxable services supplied in the UK where the supplier is overseas. A ‘domestic reverse charge’ also applies to the supply and purchase of certain goods and services in the UK.

For further information on the reverse charge, read VAT Reverse Charge - HMRC internal manual.

The control objectives in this paragraph concern the recording of output tax due on supplies received on which reverse charge applies. Input tax on reverse charge supplies is covered by the main P2P control objectives.

Control points

1. Where possible tax codes or indicators are used to separately identify reverse charge transactions.
2. Correct exchange rate is used to convert invoice values to sterling, as required.
3. Tax base amount correctly calculated.
4. Output tax values are accurately calculated and recorded.
5. Correct VAT rate applied to supplies.
6. VAT rounding rules correctly applied.
7. Output tax is recorded against the correct organisational unit.
8. Output tax is recorded for reporting in the correct VAT period.

Self-billed invoices

Self-billing is a commercial arrangement between a supplier and a customer in which the customer prepares the supplier’s invoice and forwards a copy to the supplier with the payment. The customer treats these invoices like purchase documents and may be able to claim any VAT as input tax on their VAT return.

For more information, read Self-billing (VAT Notice 700/62).

Control points

1. A self-billing agreement should be in place between the customer and supplier before the self-billing commences.
2. The agreement should specify start and end dates for the contract.
3. A process should be in place to monitor agreement dates.
4. A 12-month review should take place to check the agreement.
5. The customer must mark self-billed invoices with the reference ‘SELF-BILLING’.
6. HMRC advises that the statement ‘The VAT shown is your output tax due to HMRC’ is included on self-billed invoices.
7. The customer should check the VAT rate with the supplier as necessary, especially for new agreements and new supplies.
8. The customer should check that duplicate sales invoices are not received for self-billed supplies.
9. The customer should ensure that VAT on self-billed invoices is not declared as output tax on their VAT return.
10. The supplier must inform the customer if they de-register for VAT, transfer the business as a going concern or otherwise change their VAT registration number.