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Backdated VAT

Backdated VAT

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I am an accountant in industry and have just started working for a new company.  This company has a supplier that should have been VAT registered, but wasn't and therefore was not collecting VAT on invoices.  HMRC have now caught up with them.  The supplier has now approached us and requested copies of all invoices paid by us for the last 7 years so that they can calculate the VAT that we owe them with a view to me paying them the outstanding VAT.  Apparently this is what HMRC advised (I have asked to see a copy of this correspondence from HMRC but it has yet to materialise).  I have never encountered this before and I would have thought that if the VAT status of the supplier has changed as a result of the HMRC investigation then it would not involve me.

Am I to pay over all the VAT to this supplier only to claim it back from HMRC?  I would be very reluctant to do this as it will have a major impact on my cash flow (we are talking six figures!).  Not only that, alarm bells are ringing as it seems odd to me that this would be the outcome of the investigation since the supplier is in trouble with HMRC for not registering for VAT (amongst other things) then why would HMRC advise that I pay a considerable sum of outstanding VAT to the unscrupulous supplier?  Surely this is risky??

Replies (17)

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By cheekychappy
30th Dec 2015 14:52

It doesn't have to impact your cash flow.

Ask for an invoice for the VAT. Claim the VAT in your next return. Then pay the VAT over to the supplier.

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Stepurhan
By stepurhan
30th Dec 2015 15:17

Trying it on

If you have paid what they have invoiced you, you are under no obligation to pay them any more. It was the suppliers responsibility to register for VAT and to issue correct VAT invoices at the time. They have failed to do so. HMRC will have advised them that they have to account for VAT on sales for the period they should have been registered. That is not the same as HMRC saying that you should pay that VAT, and I would be surprised if they had actually said that.

If you refuse to pay the additional VAT, then your supplier would have to treat the original sales to you as VAT-inclusive (e.g. a £1,200 sale to you becomes a £1,000 sale with £200 VAT.) Obviously this would leave them out of pocket as it will come directly out of their margins, hence the approach to recover the VAT from you.

Edit : The question then becomes how important the supplier is to you. As cheekychappy says, you can potentially manage the cash-flow issue through the VAT return. The figure involved might distort your returns and attract your own unwanted attention from HMRC though.

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RLI
By lionofludesch
30th Dec 2015 15:23

Cash accounting

Obviously we're assuming you're not on cash accounting here.

It depends on the wording of the original contract but, unless the price was specified as being "exclusive of VAT" you're under no obligation to pay.  However, in the long run, this costs you nothing and, if you don't pay, you can expect to find the relationship with the subcontractor severely damaged.  You may or may not be bothered about this.

Have HMRC really advised this ?  Or have they just told the subcontractor that it's possible ? To be fair, it happens a lot and - surprisingly often - HMRC turn out to be the losers.  One wonders whether this may be a surprise by-product of performance related pay.

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By bernard michael
30th Dec 2015 15:38

If you refuse to pay the suppler may go into liquidation - dependent on the sums involved. They could then do a phoenix and HMRC suffer.

I think the suppler is bluffing when they say HMRC said you should pay it. Ignore them unless the supplier is key to your business. In whihc case perhaps your firm should put an offer  to buy them out of liquidation/administration

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RLI
By lionofludesch
30th Dec 2015 15:45

Jeez !!

"Am I to pay over all the VAT to this supplier only to claim it back from HMRC?"

Yes - that's how it works.  Normally on a month by month basis obviously - not seven years at once.

 

 

 "I would be very reluctant to do this as it will have a major impact on my cash flow (we are talking six figures!)."

Jeez - that's a lot of VAT and a lot of turnover to overlook......

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By Anne Robinson
30th Dec 2015 16:55

You have to do the work?
Are they expecting you to do the work to ascertain the amounts due on 7 years invoices?

No matter what way you decide to go with the vat I think they have a cheek to expect you to do the donkey work for them.

They issued the invoices in the first place let them look them up again.

Thanks (3)
Replying to AC71:
RLI
By lionofludesch
30th Dec 2015 17:12

Charge

Anne Robinson wrote:
Are they expecting you to do the work to ascertain the amounts due on 7 years invoices?

Obviously, I'd be charging for my time if I had to fish out the invoices.

But then, if they fished out their invoices, I'd fish out mine anyway to check they were right.  In which case, I wouldn't be able to charge.

So - maybe there's an advantage here in offering a helping hand.

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Routemaster image
By tom123
30th Dec 2015 16:56

I have accepted similar invoices, but only smallish values.

I have accepted similar 'VAT only' invoices in the past, but they have tended to be relatively small in value.

Generally, if a trader should have registered but did not - he tended to be one of our small suppliers anyway.

For the sake of a few hundred pounds, invoiced at the time of my VAT return or thereabouts, I tended not to bully the little guy where I didn't lose anything in the end.

If it really is 6 figures (£100k of VAT) I would also be looking for a bit of extra correspondence from the supplier, assurances from directors, and then ideally further correspondence of some kind from HMRC that they would not seek to deny my subsequent claim.

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By Malcolm McFarlin
30th Dec 2015 17:13

4 year rule

As an ex-VAT officer I am aware that this stance is often taken by HMRC otherwise, as referred to within the post by Stepurhan, the supplier will have to bear the loss.

You should be aware of the four year rule for claiming back the VAT since HMRC may allege that some of the supplies are 'out of time' for claiming back the input tax.  I would obtain written advice from HMRC before proceeding trying to re-claim 7 years of input tax.

The submission of additional input tax may trigger a visit from HMRC to verify the transaction.

Many businesses suffer when their customer[s] is no longer trading or are members of the public and it is not possible to recover the VAT

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By lechiffre
04th Jan 2016 12:28

7 years too long?

Personally I think 7 years is too long to "correct" retrospectively.

As said above I would foresee a VAT enquiry on your reclaim of input tax for that amount and what happens if your input is disallowed when the customer has re invoiced you?

I would only proceed after written clearance from HMRC.

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By gcg007
04th Jan 2016 12:40

Your supplier

Prior agreement from HMRC is essential.

You do have to ask the question..... did no one at your company, or your accountants, query the fact that you were purchasing supplies in excess of £80,000 a year from a supplier who was not VAT registered?

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Replying to Kaylee100:
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By andrew1211
04th Jan 2016 13:30

VAT backdating

gcg007 wrote:

Prior agreement from HMRC is essential.

You do have to ask the question..... did no one at your company, or your accountants, query the fact that you were purchasing supplies in excess of £80,000 a year from a supplier who was not VAT registered?

Why? The onus is on the supplier to get it right.

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Replying to Kaylee100:
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By tom123
04th Jan 2016 18:56

Interesting idea

andrew1211 wrote:

gcg007 wrote:

Prior agreement from HMRC is essential.

You do have to ask the question..... did no one at your company, or your accountants, query the fact that you were purchasing supplies in excess of £80,000 a year from a supplier who was not VAT registered?

Why? The onus is on the supplier to get it right.

An interesting idea that the customer would notice this. I have about 600 suppliers listed on my system (of which I suppose 150 are live at any one time). Whilst I do have turnover YTD reports - and use them to see which are my biggest suppliers - like most accounting reports it concentrates on the net values.

Would my auditors notice - not really sure - (never having worked in audit).

My VAT return printouts are quite good though - so you can see which transactions have no VAT on. Having said that, to find out which supplier they are takes further investigating.

I don't think most customers would pick this up as a matter of course.

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By whopkinscom
04th Jan 2016 12:49

Check you haven't been reclaiming VAT

And just be sure that your company hasn't been claiming the VAT already! I've come across that before! Yes, even without VAT invoices - Software tends to assume the category of spending has VAT and could well have been accounting for it!

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By Melody
06th Jan 2016 15:31

Is the supplier a business at risk?

If your company wishes to continue to use this supplier you should consider that their business may be at some risk, and take appropriate precautions e.g. not paying in advance for any future supplies, and ensuring that any future contracts you enter into with them are on terms that will not cause your company undue problems if they suddenly cease trading.  

As has been pointed out, you and other customers are not obliged to pay any of this VAT although it would be a goodwill gesture to do so to the extent that you have been satisfied you can reclaim from HMRC without affecting your own cash flow. You don't know how many of their other customers will be willing to do this, however,  so settling with HMRC could have a major effect on your supplier's  cash flow as well as profitability. 

Also a business of this size that has got this wrong and does not even seem well enough organised to be able to find their own records and copies of the invoices they have issued may well also have other accounting irregularities which could cause problems. So in your dealings with them you have to consider that they could go into liquidation, and that this could be sudden. 

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By andrew1211
06th Jan 2016 08:23

The auditors would never notice this and they wouldn't be bothered unless your company was unable to reclaim the input VAT for some reason in which there could be a hidden liability to come.

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By Melody
06th Jan 2016 15:42

Typo in my earlier reply now corrected
Sorry I just noticed a typo in my earlier reply (now corrected) which changed the sense of it. Of course it is your supplier's cashflow which could be very badly affected by settling with HMRC, not yours as long as you follow the advice given by others.

I'm afraid my tablet's predictive text can sometimes be over intrusive and substitute the words it decides on.

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