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VAT LATE REGISTRATION

Recently begun acting for client company who has received a compliance letter from HMRC suggesting that they should have been registered for VAT.

Details of turnover as follows (with VAT registration limits - lowest during year)  - year end is 30/9. HMRC figures to 2010.

2005 58355 (58000)

2006 60114 (60000)

2007 61255 (61000)

2008 72105 (64000)

2009 63635 (67000)

2010 70439 (68000)

2011 65123 (70000)

The company provides maintenance and management services to major landlords who are not VAT registered. The company has deliberately tried to stay below the VAT limit to avoid registration (but failed on occassions!) as it's customers would be unable to claim VAT back and it would become uncompetitive and lose business.

My instinctive answer is to initially argue that at each time the VAT registration level was breached the company had a reasonable expectation that it's turnover would fall back below the registration levels and therefore it didn't need to register.

Any thoughts would be appreciated.

Thanks.

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Registration for VAT

The problem is this:

- you can apply for exemption from registration based on a lower future turnover; but that application is required at the time you exceeded the turnover limit;

- the 'future expectation' cannot be applied retrospectively;

In my experience, HMRC have been pretty consistent on this, and have therefore tended to back date the registration, with severe impact in terms of tax and penalties.

You could argue that, had the 'future expectation' been applied, then registration would not have been necessary, but you will be reliant on HMRC mercy, which is sometimes in short supply!

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Thanks Les

I'll try the pleading route first!

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Apples & Pears

They seem to have seriously messed up their attempt to keep below the threshold, but as you are comparing annual turnover to September with the limit to the previous March your summary is in fact of no use whatsoever. You really must first get monthly turnover figures and then put in a rolling 12 month figure so that you can work out exactly when they should have registered. It is possible on your figures that there may have only been one short period in 2008 they were over and a lot of grovelling may be useful, on the other hand they could have been over all the way through

 

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Thanks Chris.

As I say the registration limits were as per HMRC correspondence. I will obtain the monthly records (the client assures me they are available) and produce the rolling figures. In 2008, I'm led to believe a one off large contract pushed the turnover sky high.

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Assuming grovelling fails

Assuming the grovelling fails and registration is required what next?

Does the company invoice the landlords for VAT only or assume the original work was VAT inclusive? I have seen contraditory answers on this subject before. Likewise with reclaiming input tax.  If VAT only invoices are raised the company is unlikely to recieve payment and they will become bad debts!

Further, if the work is assumed VAT inclusive this will result in a reduction in turnover and a subsequent reduction in CT profits?

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A choice

Either they can send new invoices charging the VAT that should have been charged (as you say, very unpopular choice!) or they can decree their earlier invoices VAT inclusive (I believe new invoices would still have to be issued correcting £117.50 to £100 + VAT [given it is back in the old days of VAT]).

However choice 2 means they lose a chunk of their income (in fact, they would have VAT to pay of... very roughly, £58k!  Unless they can find some input tax to recover).

As a side point, the second they are registered I would apply to deregister and watch the turnover like a hawk from now on.

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A choice

I agree with 'Constantly Confused.'

Whilst the client can invoice for VAT previous missed, it does not present the business in a good light, and it is unlikely to be paid by a person who cannot recover it.

Between a rock and a hard place, I'm afraid.

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mail2stg raises an interesting point

Look carefully at the wording of the contract with the clients. If it explicitly states that the charges are exclusive of any VAT, the only reasonable course of action is for the supplier to raise VAT-only invoices. In the event that these remain unpaid, then - following a recent case - it may be possible to make a bad debt relief claim for the entire amount of the unpaid VAT (previously HMRC would contend that the non-payment was non-payment of part of the gross liability and so allow only a fraction of bad debt relief).

If on the other hand the contract is silent on VAT, HMRC will almost certainly take the view that the charges were VAT-inclusive.

 

Chris - It is possible on your figures that there may have only been one short period in 2008  They must have been over in 2009/10 as well - the turnover for the year ended 30 September 2010 exceeded (just) the threshold in force at that time.

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Penalties

The penalties will be horrendous and you need to make your client aware of these asap.

Depending ofcourse on the assets in the company these penalties can result in the company becoming insolvent.

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Agreed..but what to do next.

Quote 'Depending ofcourse on the assets in the company these penalties can result in the company becoming insolvent.'

Given the figures it seems likely to me there will not be enough assets. Also with income at the level it is it must be a small 1 or maybe 2 person company. The simplest answer may be to start a new company, before things get tight. On that note you may want to think how you are to be paid too.

 

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zebaa

Agree QuoteThe simplest answer may be to start a new company, before things get tight. On that note you may want to think how you are to be paid too.

 

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