VAT on erroneous and refunded funds: accounting features and risks

In modern Ukrainian business practice, the issue of taxation of erroneously received and returned funds is of special significance. The evolving regulation of tax invoices for such operations requires both deep understanding of legislative innovations by entrepreneurs and accountants, and the ability to respond promptly to practical challenges. The relevance of this issue is driven by the growing number of electronic transactions, including mistaken transfers, and the strict position of tax authorities regarding VAT accounting for such transactions.
Legislative grounds for issuing VAT invoices for mistaken funds
According to the Tax Code of Ukraine (TCU), a tax invoice must be issued for each full or partial supply of goods and services, as well as for any amounts credited to the bank account as advance payment (prepayment). However, not every transaction in the account results in VAT obligations: everything depends on the existence or absence of business relations between the parties.
Mistaken funds without contractual relations
If a company receives money into its account from a third party with whom no contractual relations exist, according to the State Tax Service position, there is no VAT taxable event and no tax invoice is issued. If the amount is returned to the sender within a certain period (usually 3-5 days), the company is not required to prepare a tax invoice or an adjustment calculation for it.
Mistaken funds with a contract in place
A different situation occurs if the company receives an erroneous payment from a counterparty with whom it has business relations (for example, payment exceeding the invoice amount or payment made by multiple persons at once). In this case, the amount is treated as an advance for future supplies. On the date of receiving the funds, the company must determine VAT liabilities, issue, and register a tax invoice for the entire amount. If a portion is later recognized as mistaken and returned, an adjustment calculation is made to reduce the VAT liabilities after its registration in the Unified Register of Tax Invoices.
Practical algorithm for accountants

1. Analyze the purpose of received funds: Determining the presence or absence of contractual relations with the payer is key for further actions.
2. Issuing the tax invoice: If a contract exists, the invoice is issued for the total amount, regardless of whether part of it is “mistaken”.
3. Processing the adjustment calculation: Refunds are documented by a separate adjustment calculation, registered in the Unified Register.
4. Submitting explanations to the tax service: In complex cases, if additional information is requested (discrepancy inquiry or VAT invoice suspension), an explanation of the transaction details is provided.
   Judicial and fiscal practice
   The State Tax Service of Ukraine has repeatedly confirmed that where no goods or services were to be provided for the received funds (no contract/invoice), no tax invoice is issued and the amount is excluded from VAT taxation. Additionally, if a tax invoice is mistakenly issued, it should be later annulled. However, if contractual relations exist, a VAT invoice is required — even if the refund occurs the same day.
   Tax consequences of refunds
   In typical cases, when an erroneously paid amount is refunded, VAT liability exists only for the amount remaining in the company account as the actual payment for supply. If everything is returned, VAT obligations are zeroed out, but this is recorded only after the adjustment calculation is registered. Not including a mistaken invoice in the VAT declaration is also legally justified, as no actual supply occurred and there is no tax base.
   Typical problems and risks
   Blocked tax invoices — due to the formal approach of the tax service.
   Time losses on preparing explanations and supporting documentation.
   Ambiguous interpretations of funds status in complex settlements or overpayments.
   Lack of uniform practice in different regions or among tax inspectors.
   Risk of a tax dispute due to late notification about a refund.
   Recommendations for business
   Document all counterparty refund requests (official letters, email).
   Promptly verify the purpose of all payments.
   In doubtful situations, submit explanations to the tax authorities to avoid VAT invoice registration issues or declaration discrepancies.
   Conclusions
   Issuing VAT invoices for mistaken and refunded funds remains one of the most sensitive aspects of VAT accounting, requiring careful analysis of each transaction with regard to contractual basis, supporting documents, and the current tax authority position. Adhering to transparent procedures and promptly interacting with fiscal authorities reduces financial and penalty risks for enterprises and protects them from future tax disputes.

Author: Maksym Bahniuk, Head of Tax and Customs Law Practice at WINNER Law Firm.
If you have any questions or issues related to the return or crediting of erroneously received payments, preparation of tax invoices and adjustment calculations, or tax dispute resolution, seek professional advice from our company’s specialists. Timely response to such situations is the key to your business’s financial security and the avoidance of unnecessary tax risks.