I am having an issue with our accounts as a result of starting to pay VAT. In the first two years of accounts we weren't paying VAT. Expenses were shown as the full amount we had paid (including VAT).
The problem comes in year three, as six months in we become VAT registered. Why the problem? Well technicaly VAT should not be showing on our P/L. So we are showing sales and expenses without VAT. The results of this should be correct as it should mirror the amount of VAT actually paid (i.e. VAT on inputs - VAT on outputs). However, the problem is that this does not take account of all the offsetting we were able to do from previous years.
In the end the offsetting from previous years was something like £8,000. How do I reflect this in the accounts? Do I show HMRC as a debtor in the previous years? I'm not sure what the normal practice would be here.
I would be so grateful for your help. Thank you