Assessed VAT and adjustments to profit.

Assessed VAT and adjustments to profit.

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Client was assessed for underpayment of VAT. HMRC reckoned that the client was not charging VAT for toasted sandwiches. HMRC have assessed the client is owing £30,000 in back VAT (excluding penalties and interest). The client has agreed a repayment schedule with HMRC and I need to process the journals.
 
Technically speaking if the client had charged the VAT then his taxable profit would have been reduced (his franchisor would not have let him increase his prices to accommodate the VAT)). Can taxable profit be reduced by £30,000 because that's what the correct taxable profit would have reflected had he charged VAT correctly? 
 
Obviously any penalties within that amount is not tax deductible. How do I process this journal?
 
Thanks

Replies (5)

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By fiona_howells
30th May 2014 12:06

Journal

I would post the journal to where the original entries would have been if the bookkeeping had been correct so debit sales and credit VAT - obviously any reduction to income for VAT errors is tax allowable.

Thanks (1)
paddle steamer
By DJKL
30th May 2014 12:34

Considerations re final accounts

Depending on what type of entity, you will need to consider at some point:

1. Accounts disclosure

2. Tax return disclosure

If the sum is significant re the overall business then the last thing you want is an HMRC enquiry as a result of  reported lower GP%/ Lower net profits.

If a company I would take a close look at the FRSSE ( I presume qualifies) if not ,and you have a bit of discretion re disclosure, I would consider whether the adjustment ought to be shown either as a separate line in the P & L or in a note. Certainly for a sole trader/partnership I would be thinking of making use of the white boxes on the  tax return if material.

If for a company I think, from memory, the definition permitting a prior year adjustment is currently fundamental  not material,though I think the new FRSSE (2015)  in progress may change this. (Someone else on here will be far better on disclosure etc than I am, these days Accounts disclosure etc sends me to sleep)

Thanks (1)
RLI
By lionofludesch
30th May 2014 12:56

What kind of entity ?

Absolutely, definitely, unequivocably a reduction in profits.

How to show it depends on what sort of entity it is ? 

So is it a company or unincorporated business or what ?

Thanks (1)
chips_at_mattersey
By Les Howard
31st May 2014 14:44

Court of Appeal

Do make a note that the Court of Appeal has recently heard a case (Sub One Ltd T/A Subway), and its decision is due any time. This may result in the assessment being invalid.

 

Thanks (1)
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By exceljockey
02nd Jun 2014 10:37

It is a company

The entity is a company with a turnover of approximately £280K.

The VAT assessment relates to the current year and the two prior years.

Thanks (0)