Can directors charge VAT on loans they supply to their company?

Can directors charge VAT on loans they supply...

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Hello All,

I have a client who has been charging VAT on loans that he provides to the company. I cannot find any info online whether this is allowed or not. Because the loan amounts are large his company VAT return is always issued with a refund. My HMRC want to check the paper work.

Thx

Alex

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By Andywho is fed up
04th Apr 2013 11:58

VAT on loans

There are two questions that I think you need to ask yourself.

1.  Why is he charging VAT on anything anyway, unles he is registered in his own name for VAT?

2. There is no VAT on loan interest as finace is exempt, so why if he is he charging it?

Further it looks like the VAT has probably been reclaimed incorrectly by the company, but do you know if the director has decladred it to HMRC?   If so, and the situation is corrected, HMRC will not see this as a neutral position.   Expect penalties on both sides an interest charge on the company!

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By johngroganjga
04th Apr 2013 12:21

Agreed.  Crucial to know if

Agreed.  Crucial to know if director has been declaring and paying the output tax under his own registration. If not he is likely to be going to prison and should consult a criminal lawyer immediately.

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Replying to lionofludesch:
David Winch
By David Winch
04th Apr 2013 13:24

Dishonest?

Terry Akisos wrote:

... he might just be an idiot. You can't accidentally commit fraud.

I agree. Fraud necessarily involves dishonesty, which in turn necessarily requires the fraudster to have realised he was doing something most people would regard as dishonest.

By the way, was the VAT calculated on the interest or on the capital amount (the amount loaned to the company)?

David

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By johngroganjga
04th Apr 2013 12:33

You may be right, but whether that would be a good defence in court is one of the many things he needs urgent legal advice about.

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By johngroganjga
04th Apr 2013 12:59

Agreed that putting situation right, if possible, is a priority, but not as high a priority as taking legal advice first, and then only under legal advice.  Of course if he has been paying and declaring the output tax under his own registration then the position becomes much more straightforward, as there has been no loss to the Exchequer, and putting everything right is indeed the number one, and only, priority.

Agreed accountant can't act if client refuses to allow errors to be corrected, and SOCA report is required if there has been a loss to the Exchequer (but not otherwise).

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By DMGbus
04th Apr 2013 13:42

How do loans arise?

If company A supplies a van to company B, and says "you can owe me the money" then a supply liable to VAT has taken place.

If director D pays for a van bought in the name of company B and there's VAT on the invoice addressed to company B then quite correct there's VAT reclaimable by company B and company B should should show a loan debt to director D.

On the other hand if company A (or Director D) lends a monetary amount (ie. by bank transfer or cheque or even cash) then this is wholly outside the scope of VAT.

So, essentially the nature and origin of the loans needs to be established.

Presumably (I hope!) lender is VAT registered!

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Replying to thomas34:
By johngroganjga
04th Apr 2013 14:17

How do loans arise

DMGbus wrote:

If director D pays for a van bought in the name of company B and there's VAT on the invoice addressed to company B then quite correct there's VAT reclaimable by company B and company B should should show a loan debt to director D.

Agreed but the recoverable VAT there is on company A's supply to company B, and it is for company A to account for the output tax and not the director who pays company A on behalf of company B.  Here we are told the director himself has made a supply to the company on which VAT has been charged, which the company has reclaimed.

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By johngroganjga
04th Apr 2013 13:44

Yes David that is the theoretical point but the reality is subtly different - it's not whether he actually knew he was being dishonest (and he will undoubtedly say that he didn't) but whether the jury will believe him when he says that he didn't!  That is why the outcome is far from free from doubt and why he needs to take legal advice.

Following a very recent case isn't a London barrister currently serving a prison sentence for a the very same VAT fraud, where  the very same defence failed to convince the jury?

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David Winch
By David Winch
04th Apr 2013 14:00

Barristers

I think there is currently more than one barrister locked up in connection with VAT irregularities.

By the way I am not suggesting that the client should not take legal advice - merely pointing out that this would not be an 'open and shut' case of criminal VAT fraud!

David

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By johngroganjga
04th Apr 2013 14:05

Nor am I suggesting that it is an open and shut case, just that it is precisely the type of case where HMRC would be more likely to go down the criminal rather than the civil route and the client needs to be advised accordingly, and to act in accordance with that advice throughout.  If he receives legal advice that he has nothing to worry about then so be it.

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By sparkler
04th Apr 2013 14:37

more info?

Perhaps the OP could assist the discussion by providing some more details of how the loans arose and whether the VAT has been charged on the capital or interest portion of the loan, and also whether the client is registered in his own name for VAT.

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By alex simmonds
04th Apr 2013 16:58

He is a new client and VAT has been calculated on the capital. The client is long distant so I will email him to clarify the matter further

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By sue scherzo
08th Apr 2013 14:50

vat on loans

I presume we are talking about 'limited company' here?

If so why is someone doing accounts work they clearly have no idea about? sorry to be blunt but you should not hit above your real weight in accounting matters!

If not...who is registered for vat? you cannot charge vat if you are not a registered party, basics.

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Replying to johngroganjga:
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By Joolls B
10th Apr 2013 10:24

Vat on loans
I agree , this is standard accounting knowledge, I am so tired of coming across people who put themselves out as accountants when clearly they are probably bookkeepers. There is a reason why we train for years to get a recognised qualification. It's not just a case of adding and taking away the numbers. I'm sorry if you are a qualified accountant but I think you definately need to go back to school.

Your client needs to seek legal advice.

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By nogammonsinanundoubledgame
08th Apr 2013 15:31

Regardless of whether or not VAT should have been charged, ...

... it is to be hoped that the large VAT refunds claimed by the company are broadly netted of the sizeable VAT payments that he remits personally on the VAT charged under his own name.

With kind regards

Clint Westwood

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By pawncob
08th Apr 2013 19:04

Charged on Capital?

Please explain, because it does sound like VAT fraud.

(Is the OP just very unlucky in his choice of clients I wonder?)

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By chesca24
15th Jul 2013 07:47

VAT on loans

A reviled credit product, refund anticipation loans or tax refund loans, was wiped out last year via regulatory measures. It was intended to stop people borrowing against their tax refunds. However, numerous slightly different goods offering the same thing are alive and well. Resource for this article: 5000 installment loans no credit check no payday

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