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Co went over vat threshold but not if cash basis?

Clients company had sales 120k but only 50k was received. The customer went into liquidation.

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My client company should have received income last year circa 120k. This is the turnover recorded in their books.  But their main customer went into receivership. They advised therefore that their true turnover was 50k. There is a bad debt recorded which of course does not come off the turnover.  So the accounts will reflect the 120k and will probably ring alarm bells at hmrc as the business was not registered for vat.

The company did its bookkeeping very late and this has only recently been picked up as the company accounts are due this month.  

The company say they contacted a HMRC vat specialist who said they could apply the cash basis and not register despite being temporaily over the  85k threshold for several months, but there is nothing in writing. 

I can find nothing to confirm that the turnover can be based on the cash basis. 

I am nervous about continuing to act for the company in these circumstances. 

Can anyone shed any light on whether their position is correct please? 

Many thanks

Replies (21)

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Jerome lane stewart and co
By Jerome Lane
08th Nov 2019 08:13

Even HMRC are unlikely to take the client to task in this scenario unless the company in liquidation is likely to make good on the debt. With a bad debt, the pain is reduced for your client by reclaiming the VAT on the supplies it made (assuming it is out of pocket as a result) and conversely HMRC will be picking up the cost of the VAT on purchases rather than your client. The client should sharpen up their monitoring of their turnover or even consider if voluntary registration is the way to go. Maybe steer them towards cloud accounting and be a bit more proactive helping them manage their business rather than think about sacking them off - unless they're just trouble and bad fee payers. Everyone makes mistakes. It's the people who don't learn from them that you should worry about...

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Replying to Jerome_Lane:
RLI
By lionofludesch
08th Nov 2019 09:25

Jerome_Lane wrote:

Even HMRC are unlikely to take the client to task in this scenario ....

I disagree.

Several years ago, I had them pursue a client who had ceased trading, with all her supplies to registered traders, knowing that recovery of input tax would leave them around £3000 out of pocket.

It's some guy at HMRC earning brownie points.

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Replying to Jerome_Lane:
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By Paz
08th Nov 2019 10:01

I think this is down to the personality of the individual officer and how they would view the situation and why I wouldn't rely on the reported telephone conversation with HMRC.

Now if they had something in writing, I would be happy with that.

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Psycho
By Wilson Philips
08th Nov 2019 08:21

Cash basis is a red herring as you can’t apply the cash basis unless you’re in a position to do so, ie registered. Unless there are grounds to argue that turnover will remain below threshold registration would appear to be required.

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Replying to Wilson Philips:
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By Paz
08th Nov 2019 09:58

This was also my conclusion based on everything I had read.

If anyone has anything concrete that is contrary to this I would be very grateful if you could share links.

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Replying to Paz:
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By Matrix
08th Nov 2019 12:06

You need to look at the tax point of the taxable supplies since this is when the turnover would count towards the threshold.

Anyway, I agree with you. Are the other clients able to recover VAT?

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Psycho
By Wilson Philips
08th Nov 2019 08:22

Duplicate

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RLI
By lionofludesch
08th Nov 2019 12:25

Given that there's a £70000 bad debt, the client may be better off registering anyway.

Depends on what he sells. And, indeed, buys.

Thanks (1)
Replying to lionofludesch:
Psycho
By Wilson Philips
08th Nov 2019 12:35

lionofludesch wrote:

Given that there's a £70000 bad debt, the client may be better off registering anyway.


?
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Replying to Wilson Philips:
RLI
By lionofludesch
08th Nov 2019 13:00

Wilson Philips wrote:

?

You're going to need to be more specific.

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Replying to lionofludesch:
Psycho
By Wilson Philips
08th Nov 2019 13:03

Specifically, why you think that the £70k bad debt would make it worthwhile registering?

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Replying to Wilson Philips:
RLI
By lionofludesch
08th Nov 2019 13:21

I'm not so bold as that. I merely say it might be worth registering.

If the guy's selling stuff with a 100% mark-up, he'll have £20000 output tax, £10000 input tax and £10833 bad debt relief.

Plus any random input tax on his expenses.

On the other hand, he may have exempt inputs.

We don't know.

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Replying to lionofludesch:
Psycho
By Wilson Philips
08th Nov 2019 13:51

Yep, I should have worded my question differently - "Why do you think he *might* be better off?"

As you say, it's all ifs, buts and maybes. Your figures imply that the full £120k sales arose at a time when he should have been registered. It is possible that none of the £120k would be VATable.

We don't know.

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Replying to Wilson Philips:
RLI
By lionofludesch
08th Nov 2019 14:21

Wilson Philips wrote:

Yep, I should have worded my question differently - "Why do you think he *might* be better off?"

As you say, it's all ifs, buts and maybes. Your figures imply that the full £120k sales arose at a time when he should have been registered. It is possible that none of the £120k would be VATable.

We don't know.

He might be better off backdating his registration.

We don't know.

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By fawltybasil2575
08th Nov 2019 15:39

@ Paz (OP).

There are many “facts and figures” which one would need in order to determine how best to approach, and then later correspond further with, HMRC.

There are various (some inter-related) aspects which require consideration, in order to act in the best interests of your client company. In intending no offence, I feel that the wording of your question indicates that these VAT aspects are not within your comfort zone, and I would thus respectfully suggest that you take advice from an accountant more experienced in the VAT field and/or a VAT specialist, or (preferably) that you hand the matter over to that other accountant/VAT specialist.

The aspects requiring consideration include:-

(1) Compulsory Registration
(2) Voluntary Registration
(3) Cash Accounting
(4) Flat-Rate Scheme
(5) Annual Accounting Scheme
(6) Penalties.
(7) Nature of business.
(8) The proportion of customers who could/would recover VAT charged to them.
(9) “VAT only” invoices.
(10) Bad Debt rules.

On the basis of the information supplied by you, I would be 80% confident that the client company would receive an overall Repayment from HMRC (due fundamentally to the substantial Bad Debt).

Basil.

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By David Gordon FCCA
11th Nov 2019 11:09

Sometimes I wonder about the professional standards of, or who, I am actually replying to.
1)
Cash accounting for VAT is covered clearly, and understandably, in VAT notice 731.
If you deal with VAT on behalf of clients, but have not spent the fifteen minutes it takes to read this notice, go stand in the corner.
2)
Similarly the simple VAT rules for Bad Debts.
3)
If a company goes into liquidation the accountant loses all authority to act for the company, except and unless instructed by the Official Receiver or the Insolvency Practitioner.
In particular he or she may not perform any further services or charge any fees except and unless the Official Receiver or the Insolvency Practitioner, who assume "Directors" authority for the company, have authorised the work. So, your question is out of order. You should know you no longer act for the company. Any documents you hold, subject to the rules of Accountant's Lien, must be handed over. In fact the O.R. as an officer of the Court has authority to order you to spend time on the liquidation process for which you will not be paid.
In particular, if the company were substantial, you might find yourself with a PI claim for messing with matters regarding which you were no longer so entitled to do.

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Replying to David Gordon FCCA:
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By wob
11th Nov 2019 11:20

er

re (3) there's no suggestion the OP's client is in liquidation!

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Replying to wob:
RLI
By lionofludesch
11th Nov 2019 11:33

wob wrote:

er

re (3) there's no suggestion the OP's client is in liquidation!

On the other hand, a £70000 bad debt is often not a good thing.

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Replying to lionofludesch:
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By Tax Dragon
12th Nov 2019 06:44

I make it about 58.3% of the turnover for the year in question and perhaps 100.3% of that of the previous year. But then I struggle with 2+2, as you know... and I still don't even know where £10,833 came from.

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By Steve99
12th Nov 2019 01:10

Several things going on here, the company is required to register one month after they reach the t/o limit. Obviously your client then needs charge vat on his invoices if required. Next if they haven't then you assume the sales are vat inclusive. Next in order to recover vat on bad debt you need to have paid it over in the first place. Once a debt is deemed bad and written off in your accounts you can recover the bad debt providing it is 6 months older than the date of the invoice from the payment due date. But it does need to have been paid over. Obviously you are then entitled to recover vat on your costs since edreams, plus vat on stock on hand plus services 6 months prior to edr. You just need to sit down and do the maths. But dont forgetting you haven't registered at the correct time there could he belated notification penalty. The fact the customer is now in liquidation is not an excuse not to register...

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By Steve99
12th Nov 2019 01:10

Several things going on here, the company is required to register one month after they reach the t/o limit. Obviously your client then needs charge vat on his invoices if required. Next if they haven't then you assume the sales are vat inclusive. Next in order to recover vat on bad debt you need to have paid it over in the first place. Once a debt is deemed bad and written off in your accounts you can recover the bad debt providing it is 6 months older than the date of the invoice from the payment due date. But it does need to have been paid over. Obviously you are then entitled to recover vat on your costs since edreams, plus vat on stock on hand plus services 6 months prior to edr. You just need to sit down and do the maths. But dont forgetting you haven't registered at the correct time there could he belated notification penalty. The fact the customer is now in liquidation is not an excuse not to register...

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