Underdeclaration of VAT, tax treatment

Underdeclaration of VAT, tax treatment

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New client was subject to VAT investigation. Operating Flat rate scheme but had incorrectly claimed input VAT on capital purchases which were disallowed over number of  previous years.

HMRC have hit her with a 5 figure bill & corresponding interest.

Balance sheet to show Net VAT due creditor but what about debit side. Write-off against P/L account ?

Importantly, what about tax treatment - disallow in SA tax return as incurred in prior years?

Comments & advice welcomed.

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By ashahid786
21st Jan 2015 23:34

Debit would go to the capital asset cost
In my opinion if the original claim was made on capital assets over £2000 which has now been disallowed then the cost of these assets would be debited up as at the time of preparing accounts net purchase price would have been taken. However if these items were revenue nature then cost of sales may have been under-declared in earlier years which will give rise to prior period adjustment against the profit & loss reserve account. In earlier case, it does not effect P&L account so no tax adjustment is required except may be higher capital allowances. In later case it is a legitimate tax deduction, however need to be mindful of the time limit etc.

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