Key takeaways
- A VAT refund is not revenue. It is the settlement of a receivable from the Revenue Department and does not affect WIP
- Before recognising a receivable, check whether the input VAT is creditable
- Input VAT on constructing buildings for sale, where the sale is subject to Specific Business Tax (SBT), may be prohibited input VAT and become a project cost
- The VAT receivable must always be presented separately from WIP
Introduction
In large construction projects, developers often pay a large amount of input VAT to contractors before any output VAT arises. If the business is entitled to claim input VAT credit, this accumulated balance can be refunded by the Revenue Department. Accountants are often unsure how to record the refund once received and whether it affects project cost. This article explains the accounting for the whole cycle.
Check first: The cycle in this article applies when input VAT is creditable, for example for a business that is subject to VAT. Sales of real estate fall under SBT, and Supreme Court Judgment No. 2549/2732 held that input VAT on constructing buildings whose ownership is transferred and which are subject to SBT is input VAT that may not be deducted under Section 82/5(6). In such a case the VAT is not a receivable and should be considered for inclusion in WIP cost. Projects that have both a sale portion and a portion subject to VAT must apportion input VAT with a tax adviser.
The full accounting flow
This example uses a VAT rate of 7%, which is a reduced rate below the statutory rate; the latest royal decree is reported to extend it to 30 September 2027. Check the current rate before use.
Step 1: Receive the contractor's invoice
Dr. WIP – construction cost 1,000,000
Dr. Input VAT 70,000
Cr. Contractor payable 1,070,000
Step 2: Pay the contractor
Dr. Contractor payable 1,070,000
Cr. Cash/bank 1,070,000
Step 3: File PP 30 to claim the refund
When input VAT exceeds output VAT, the business may choose to claim a cash refund instead of carrying the balance forward as a credit against the following month, by transferring the balance to a receivable from the Revenue Department.
Dr. VAT refund receivable 70,000
Cr. Input VAT 70,000
Step 4: Receive the refund
Dr. Cash/bank 70,000
Cr. VAT receivable 70,000
Receiving the refund at this step has no effect on the WIP account. It is simply the settlement of a debt owed by the Revenue Department.
The full cycle of a VAT refund
| Steps | Input VAT | VAT receivable | Cash |
|---|---|---|---|
| Receive invoice | 70,000 | 0 | 0 |
| Pay contractor (including VAT) | 70,000 | 0 | (1,070,000) |
| File PP 30 | 0 | 70,000 | (1,070,000) |
| Receive refund | 0 | 0 | (1,000,000) |
At the end of the cycle, the net cash outflow equals the WIP of THB 1,000,000, as it should.
Presentation in the statement of financial position
| Item | THB | Classification |
|---|---|---|
| WIP – construction cost | 1,000,000 | Inventory |
| VAT receivable | 70,000 | Current assets |
The VAT receivable must always be presented separately from WIP because it is a claim against the Revenue Department, not part of project cost.
Special cases to watch
1. The Revenue Department approves only part of the refund
If some items are not approved, for example because of incomplete tax invoices or because the input VAT is prohibited, the unapproved portion must be recognised as an expense, or as project cost if it is input VAT related to costs and did not arise from a documentation error. The effect on net taxable profit should also be reviewed.
Dr. Cash/bank (portion received)
Dr. Disallowed tax expense (portion not approved)
Cr. VAT receivable (full amount originally recognised)
2. VAT that cannot be refunded because the deadline has passed
If the refund deadline under the Revenue Code has passed, check the applicable section and the time count with a tax adviser. The VAT receivable must be written off, on the following principles:
- If the project is still under construction and the item is a directly related cost, consider Dr. WIP / Cr. VAT receivable
- If the project is complete, or the loss arose from a failure to follow up, consider Dr. Expense / Cr. VAT receivable
3. Interest on delayed refunds
Section 4 Decies of the Revenue Code authorises payment of interest on refunded tax at 1% per month or part of a month, under the criteria set out in a ministerial regulation, so it does not arise in every case of delayed refund. When received, record it separately as income.
Dr. Cash/bank
Cr. Interest income from the Revenue Department
Conclusion
When input VAT is creditable, receiving a VAT refund is simply the clearing of the receivable from the Revenue Department and the return of cash to the business. It is not revenue and does not affect WIP. The points that need the most care are (1) establishing the right to input VAT credit before recognising the receivable, (2) following up the status of the refund claim regularly, and (3) recording adjustments when the Revenue Department approves less than the full amount or when the refund deadline has passed.
Keeping WIP and the VAT receivable clearly separate means the financial statements reflect the project's true position and helps management see correctly the cash flow awaiting refund from the government.