Gross or Net of VAT Accounts for Wayward Client?

Self-employed client, should have VAT registered donkeys' years ago.

Didn't find your answer?

New to us self-employed client, with a dearth of earlier paperwork due to (uncommunicative) preceding (non-qualled) accountant shutting up shop at short notice.  

A cursory check on the 2021-22 records has revealed that previous accountant stated (accruals-based) accounts net of VAT, presumably on the basis that client would register for VAT. T/o £120k gross / £100k net.

Fast forward a year to 2022-23's accounts (and indeed to present day 2024) and client has yet to VAT register.

Question: should we follow the earlier accountant's lead by producing our 2022-23 accounts, and their resultant taxable profits, net of VAT? Needless to say, the client will be strong-armed into VAT back-registration one way or another.

The decision needs to be made up front, due to the constraints of the cloud accounting software which doesn't cater for u-turns in VAT registration matters.

I'd be grateful for opinions on this. An SAR is on the cards - that's a given - but the more immediate practicality is to make a value call right away on the matter of net of VAT or gross accounts.

Replies (56)

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By johnthegood
23rd Feb 2024 06:58

Your comment "The decision needs to be made up front, due to the constraints of the cloud accounting software" alarms me - software is the tail, it does not wag the dog, as soon as it does you need to get a new tail, cos that one ain't doing its job.

That aside, ask yourself, what if this client leaves after we have prepared this year and never registers for VAT, personally I would prepare the figures as they are ie gross, they were not VAT registered, if and when they do it can be unraveled, to do it any other way is inaccurate and will result in not enough tax being paid.

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By I'msorryIhaven'taclue
24th Feb 2024 11:38

Thanks John, point noted about the software. I'd like this dog-of-a-job to have a single tail, either net of VAT or VAT inclusive, from the outset. Changing horses mid-stream would mean re-inputting the entire year's transactions.

Re your second para, it looks like that's exactly what's happened to our predecessors.

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By adam.arca
23rd Feb 2024 08:11

Hmmm, think I would go the other way to the previous post and prepare net accounts. That is, after all, what *should* have happened, puts you on all fours with the *correct* position and involves less unravelling down the line.

I think it’s important that the client knows he owes £x in VAT and I think I would be disclosing that on the face of the B/S as a creditor in its own right so it’s out there for the client, his dog and anyone else looking.

Perhaps you need to have The Chat before you get into preparing accounts, though?

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By SXGuy
23rd Feb 2024 08:20

Have a chat with the client first. Are you intending on requesting authorisation to register the client for vat? Or simply advising client should register? If I got the go ahead to do it, I'd prob create net accounts. If it was simply an advisory I'd do gross.

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By lionofludesch
23rd Feb 2024 08:34

When are you going to register him from ? DYA?

That said, HMRC don't object to dealing with VAT inclusive accounts, even in the days when they looked at them. Profit should be the same if you get the right accruals, though they don't look pretty to my eye.

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Replying to lionofludesch:
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By Bobbo
23rd Feb 2024 09:57

lionofludesch wrote:

When are you going to register him from ?

OP, this is an important point - is it known when client breached registration threshold?
Obviously with turnover of 120k it was not later than sometime in the 2021/22 accounting period, but was it one month into that year or in the final month of the year?

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Replying to Bobbo:
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By I'msorryIhaven'taclue
23rd Feb 2024 12:55

My best guess, at this stage, would be threshold breached early to mid 2021.

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Replying to I'msorryIhaven'taclue:
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By lionofludesch
23rd Feb 2024 13:21

Any chance of billing the VAT on to the customers?

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Replying to lionofludesch:
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By I'msorryIhaven'taclue
24th Feb 2024 11:27

Good shout, but sales were all BTC to non-VAT registered customers.

To some extent that helps simplify the net of VAT accounts option: as someone points out further down the thread, if we were to prepare net accounts and the client is able to invoice and collect VAT retrospectively then our net of VAT accounts would understate the taxable profits.

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By williams lester accountants
23rd Feb 2024 08:46

It may be neither, as client may register then recover VAT from some of his customers and take the hit on others. So, on that basis i would prepare gross and when the VAT registration is confirmed, make the necessary adjustments then.

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By I'msorryIhaven'taclue
23rd Feb 2024 09:27

Thank you all for your replies.

The one factor that had me leaning towards net accounts is that the previous accountant prepared his 2021-22 accounts net of VAT. My initial instinct was tohat I should follow suit. Incidentally, by "accounts" I mean he submitted income and expenditure figures, with no balance sheet.

Preparing them net meant a significantly lower taxable profit (£100k t/o rather than £120k t/o).

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By rmillaree
23rd Feb 2024 09:28

Its probably a matter of fact whether you client has been charging vat or not - personally i would not want to be proceeding until i had evidence of the application for vat registration confirming the date to be used - or suitable confirmation from client that its agreed that this is date and its agreed registration wil be doen pronto and evidence will be provided asap

Whatever is on the tax return might be right might be wrong and might need changing.

It might be more complicated if there may be execption from registration or only small period where registered.

If necessary i would be submitting tax return with estimates as approrpiate on basis they would need to be redone when the vat fact is confired.

"!The decision needs to be made up front, due to the constraints of the cloud accounting software which doesn't cater for u-turns in VAT registration matters."

The software should never lead in this regard the facts lead and the software comes into line best it can - if data needs be exported to excel and adjusted thats the way to go if software is out of synch for any reason. You may be able to adjust in software.

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Replying to rmillaree:
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By I'msorryIhaven'taclue
24th Feb 2024 11:49

Thanks RM, some good ideas there.

Pinpointing the VAT registration date will involve going back at least two years. Previous accountants has no working papers, no previous "accounts", and there's been no bookkeeping. (All we have is previous year's tax return from HMRC). Most certainly a separate engagement to our current LofE, to prepare accounts and SA return for 2022/23.

No exception ever applied for. We know that much.

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By Paul Crowley
23rd Feb 2024 09:30

Gross every time.
Things can be altered or amended later.

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By Roland195
23rd Feb 2024 10:00

Is the client in a position to pay this VAT (and you while we are at it). We seem to be talking about three years at this point which would be around £40k at a low estimate depending on what they do plus interest & penalties.

should the client not be taking insolvency advice instead?

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Replying to Roland195:
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By I'msorryIhaven'taclue
24th Feb 2024 11:56

£40k is my low estimate too. Always assuming their pre-lockdown t/o was <£85k. The penalties are presumably going to be 15% if he registers, or nearer the 100% if HMRC register him. Incidentally, I'm surprised HMRC haven't picked up the £100k t/o on the 2022/23 SA return.

It's a self-employed sole-trader btw, so no insolvency option.

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By Truthsayer
23rd Feb 2024 10:15

In your shoes I would not prepare accounts at all until the VAT registration is done. Problem solved.

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Replying to Truthsayer:
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By I'msorryIhaven'taclue
24th Feb 2024 12:03

Thanks, Truthsayer. On that line of thinking I'm left with writing up the books, quantifying the VAT liability, but sitting on the draft accounts.

Or, in other words, not submitting the overdue 2022-23 SA return.

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By adam.arca
23rd Feb 2024 13:24

Interesting divergence of views on this one.

Might be one where some CCAB guidance would be good because it's potentially a damned if you / damned if you don't situation.

Do you prepare net and put the dodgy client on all fours with a compliant one? Risk is the VAT is never declared and dodgy bloke walks off with ill gotten gains but at least the right direct tax has been declared.

Or do you prepare gross because that is what dodgy has had? Risk is that accounts are definitively wrong because you're including VAT within sales when VAT can never be part of sales. There's also the risk that other people like mortgage providers could claim the profit has been overstated. But, on the other hand, at least you're stiffing dodgy for a bit more direct tax than he should be paying.

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Replying to adam.arca:
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By Paul Crowley
23rd Feb 2024 15:23

Without a valid VAT registration is the VAT really VAT?

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Replying to Paul Crowley:
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By adam.arca
23rd Feb 2024 15:48

Yes. Source: HMRC (which I appreciate isn't necessarily the law but probably is in this case, he says as can't be bothered to hit the references).

Obviously, I appreciate there are all sorts of riders and complications but, for the sake of my comparison, I'm assuming a straightforward, plain vanilla case.

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Replying to Paul Crowley:
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By More unearned luck
23rd Feb 2024 16:02

Its output tax but perhaps not input tax?

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Replying to adam.arca:
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By Roland195
23rd Feb 2024 17:15

I'm not really following why you wouldn't prepare on a net basis - there is a constructive liability in relation to the VAT that surely needs to be recognised for a true and fair view?

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Replying to Roland195:
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By adam.arca
23rd Feb 2024 18:24

Well, I would prepare on a net basis: see my first post @ 8:11.

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Replying to adam.arca:
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By I'msorryIhaven'taclue
24th Feb 2024 12:18

Thanks Adam and Roland. I fear I'm in danger of hearing what I want to hear - a bit like the Joe Public chancers that happen along here with protracted issues - although I am leaning towards net of VAT accounts.

The overriding rationale for me is that the previous (2021-22) year's SA103 figures were submitted net of VAT by the previous accountant. My tin-pot logic dictates that if we were to submit 2022-23 figures inclusive of VAT then we'd be bound to amend the net of VAT 2021-22 SA103 figures to gross of VAT (and probably the same for earlier years too).

In short, I'm inclined to follow suit with the previous year's submission.

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By More unearned luck
23rd Feb 2024 16:00

As truthsayer says the first thing you do for the client is to get him registered and to sort out the back VAT (and penalties). If the client doesn't agree to that then he is a crook and you shouldn't have any dealings with him.

I would have thought this was so obviously the right thing to do I'm surprised by your question and by some of the responses.

An AML report isn't required if you have been engaged to regularise his VAT position and do so.

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Replying to More unearned luck:
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By adam.arca
23rd Feb 2024 18:29

You and Truthsayer are both right IMO but that’s spoiling the fun of a relatively unusual and interesting “what would you do and why” discussion on gross vs net accounts :)

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Replying to adam.arca:
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By More unearned luck
23rd Feb 2024 19:42

On that point see the guidance about VAT on page SEFN4, which is oddly absent from the guidance note to the short SE pages (VAT registered traders with t/o of less than £85k aren't given any help on this topic).

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Replying to More unearned luck:
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By adam.arca
24th Feb 2024 07:55

Interesting, thanks. If I’ve ever read that, it’s flown out of mind. But then I don’t think the Revenue have any business issuing accounting guidance. Although I can see the sense of the distinction they’re advising if you really must use the cash basis.

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Replying to More unearned luck:
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By I'msorryIhaven'taclue
24th Feb 2024 12:47

I've never read that SEFN4 VAT guidance either.

"If you’re VAT registered and using cash basis, details of your income and expenses would typically include VAT."

Off-topic, I'm relieved that's not mandatory.

Re the client's a crook then you could well be right. At the moment I'm giving him the benefit of the doubt - the previous accountant closed at short notice and has provided no records whatsoever, is uncommunicative, and has submitted a 2021-22 SA103 with £100k net of VAT t/o without following through with a VAT registration. Jury's out on that one.

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By lionofludesch
23rd Feb 2024 18:58

What's still not clear to me is, is this fella going to register or not?

If no, there's no issue. Send him on his way.

If yes, prepare the accounts VAT inclusive or exclusive, whichever is easier. Profit is the same.

What's the delay here?

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Replying to lionofludesch:
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By I'msorryIhaven'taclue
24th Feb 2024 13:02

Thanks Lion,

He knows he has to register, it's just a question of when.

Originally he thought he would need to register from last October when he tipped the threshold, so our 31st March 2023 accounts would have been prepared gross. But the further we delved into the figures the further back went the registration date; until eventually a 2021-22 SA return materialised, revealing a £100k t/o. Since then we've managed to ascertain that the £100k t/o was net of VAT ie £120k was banked in 2021-22.

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By adam.arca
24th Feb 2024 08:08

Not necessarily disagreeing with you, Lion, but your points do raise a few issues / quibbles / discussion topics / whatever:

You say the accounts can be drawn up VAT inclusive or exclusive. That would be in contravention of SSAP 5 (had to google for the number!) although I have no idea if the modern equivalent has anything to say on the subject. Not exactly a deal-breaker, I agree, but still...

You also say that the profit will be the same either way. That would only be the case if the VAT balance is accrued for. When I worked for a small rural practice about a million years ago who liked to cut the odd corner, there was definitely no VAT accruing going on and, in practical terms, I highly doubt there is much going on now for smaller practices banging out statements of earnings for clients who are VAT registered.

Also, and apologies if I’m reading you wrongly, you seem to be answering a slightly different question to everyone else who are contrasting net accounts where the VAT is addressed as it normally would be vs gross accounts where VAT is completely ignored because the trader happens not to be VAT registered yet.

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Replying to adam.arca:
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By lionofludesch
24th Feb 2024 12:19

adam.arca wrote:

Not necessarily disagreeing with you, Lion, but your points do raise a few issues / quibbles / discussion topics / whatever:

You say the accounts can be drawn up VAT inclusive or exclusive. That would be in contravention of SSAP 5 (had to google for the number!) although I have no idea if the modern equivalent has anything to say on the subject. Not exactly a deal-breaker, I agree, but still...

Sure but the trader is not a company and isn't bound by SSAP5.

Quote:

You also say that the profit will be the same either way. That would only be the case if the VAT balance is accrued for. When I worked for a small rural practice about a million years ago who liked to cut the odd corner, there was definitely no VAT accruing going on and, in practical terms, I highly doubt there is much going on now for smaller practices banging out statements of earnings for clients who are VAT registered.

That's just poor accountancy, is it not? It's no excuse. If the profit's not the same, at least one of the sets of accounts is wrong.

Quote:

Also, and apologies if I’m reading you wrongly, you seem to be answering a slightly different question to everyone else who are contrasting net accounts where the VAT is addressed as it normally would be vs gross accounts where VAT is completely ignored because the trader happens not to be VAT registered yet.

Possibly. But imho, the order of play should be to determine the EDR first, everything else follows.

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Replying to lionofludesch:
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By I'msorryIhaven'taclue
24th Feb 2024 13:19

I'm leaning towards determining the endpoint first (by determining the point for VAT back-registration, if that's what that means: currently January 2021 based on the scare information we have, but quite probably earlier).

And given the VAT in the 2022-23 year we are currently preparing will form part of the eventual overall VAT liability I guess we need to set Xero to VAT registered from the outset.

I'd mentioned it earlier, but I'm inclined to opt for net of VAT because that's the way the previous accountant presented the 2021-22 SA103. Otherwise I'm (arguably) stuck with revising earlier year's / years' SA103 figures for which I hold barely any information; only to revise them back to net of VAT when eventually the client VAT registers.

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Replying to I'msorryIhaven'taclue:
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By lionofludesch
24th Feb 2024 15:44

I&#039;msorryIhaven&#039;taclue wrote:

I'm leaning towards determining the endpoint first (by determining the point for VAT back-registration, if that's what that means: currently January 2021 based on the scare information we have, but quite probably earlier).

You ca only work on the information you have. If you don't have enough to disprove an EDR of January 2021, then I'd go with January 2021.

That still leaves 15 months of VAT registration where SA returns have already been submitted and I might deal with that period differently. Spreadsheet showing only VAT-bearing transactions, perhaps.

You can't plait sawdust.

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By Matrix
24th Feb 2024 12:07

I would prepare net but not file anything, including the 22-23 tax return, until you have done everything and been paid.

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By DKB-Sheffield
24th Feb 2024 12:51

My personal twopennarth suggestion would be...

1. Prepare NET for accounts and return (ensuring balance sheet included in return showing current and prior year liablity
2. Advise client of potential liability (so they can pay thus reducing interest and surcharge)
3. DON'T FILE. Make client aware that you will not file until movement on VAT (point 4 and 5)... and that failure to file will incur additional penalties.
4. Assertaining VAT EDR, reviewing liabilities, registration, and first return will be a significant issue (and a separate engagement IMO). This should be carried out with a level of immediacy (to which the client needs to give solid assurances).
5. SA return to be filed once VAT applied for/ registered/ first return (your decision based on risk, likelihood of reg, trust in client to see it through etc.)

Agree ALL of the above in writing (with verbal clarification and signed agreement). Also include sufficient clauses that the liability (point 2) will be (somewhat) based on estimations, and will not - at this stage - take account of prior years (which may need reviewing).

If the client is not willing to accept those terms, I'd be questionning (myself) whether they are intent on 'doing the right thing' to resolve... thus considering whether to accept and/ or whether an SAR is required. I'd also be very suspicious if client is unwilling to also engage you to carry out the registration (or at least have a part in)... to the extent that this would also be part of my terms!

Obviously, it goes without saying that this is not advice (you know that - as a regular) and is solely based on my Saturday afternoon musings of how I could (if faced with this situation) handle it. I certainly haven't had a good long thought of the legal or ethical considerations. However, I'd be unwilling to move forward, unless I had assurances that the VAT issue would be dealt with forthwith!

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Replying to DKB-Sheffield:
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By FactChecker
24th Feb 2024 13:40

Agree with all that ... but just to re-emphasise the most important bit:
"I'd be very suspicious if client is unwilling to also engage you to carry out the registration (or at least have a part in)... to the extent that this would also be part of my terms!"

Hadn't realised quite how cynical I'd become (others may well beg to differ), but proceeding without direct evidence that VAT registration has been submitted would be both foolhardy and (probably) prove expensive.

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Replying to FactChecker:
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By I'msorryIhaven'taclue
24th Feb 2024 14:25

FactChecker wrote:

Hadn't realised quite how cynical I'd become (others may well beg to differ), but proceeding without direct evidence that VAT registration has been submitted would be both foolhardy and (probably) prove expensive.

Which is ostensibly what the previous accountant did a year ago!

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Replying to DKB-Sheffield:
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By I'msorryIhaven'taclue
24th Feb 2024 14:23

Thanks DKB,

1. Net of VAT accounts it is - I'm grateful for everyone's opinions on this matter; the vote's been about 50%/50% but for me it's reassuring to know that I'm not totally out of step as in 99%/1%. A balance sheet would be a bridge too far, as I have no previous year's accounts (there simply aren't any) and the SA103 contains P&L figures only. My BS for 2021-22 is presently a bank balance and proprietor's capital account.

2 & 3. Not filing SA return should work well. The leverage on the client I foresee there is that we would only agree to file with a white-box VAT note; which alert could lead to HMRC to "catch" client for themselves and charge up to 100% penalties. If, on the other hand, the client were to register of his own volition I believe the penalties are 15% of VAT due. Must check that.

4. Ascertaining the VAT EDR, or for that matter quantifying the VAT liability, will indeed be a mammoth job. There are no bookkeeping records; just bank statements and boxes of (gappy) invoices. Definitely the subject of a separate LofE to the 2022-23 accounts prep / SA return agreement we are contractually bound to at present.

5. Agreed... for me, filing the SA return without a strong white-space note can only happen if the VAT reg process is well under way. There's always the SAR sword, I suppose, if the VAT registration stalls or stops short.

I'm absolutely amazed btw that HMRC haven't picked up on the 2021-22 SA return which declared a £100k t/o, by enquiring about the lack of VAT registration.

Just musing aloud - thank you so much DKB for doing the same on your Saturday afternoon!

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Replying to I'msorryIhaven'taclue:
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By FactChecker
24th Feb 2024 15:10

A bit obvious, but I presume there's no chance that any of those t/o figures include a material amount of VAT-exempt (out of scope) supplies?

As far as HMRC are concerned, I've given up being surprised or not-surprised by what they do/don't do ... my Dr tells me that too many abrupt turnabouts are injurious to my health!

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Replying to FactChecker:
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By I'msorryIhaven'taclue
24th Feb 2024 15:49

Nice try, but I'm afraid not. Nothing exempt or out of scope (nor for that matter anything that might conceivably be so).

It's odd with HMRC - in another current thread the OP is in a pickle as to whether to double-dob his client and client's spouse in it by making minor adjustments to their tax returns for their rental property percentages. After all, HMRC want their returns to be just so!

And yet, HMRC are evidently incapable of cross-checking a >£85k sA103 turnover to whether a client is VAT registered. And why is it the "self-employed" private carers in our village earn £1,000 pw without ever registering for taxes? I don't believe HMRC realise just how wide of the mark they are.

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Replying to I'msorryIhaven'taclue:
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By lionofludesch
24th Feb 2024 15:57

I&#039;msorryIhaven&#039;taclue wrote:
I don't believe HMRC realise just how wide of the mark they are.

No, they don't.

Instead of SA returns, maybe they should just say "Send us what you can spare".

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Replying to lionofludesch:
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By I'msorryIhaven'taclue
24th Feb 2024 16:12

Good idea... I could send them my mother-in-law.

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Replying to I'msorryIhaven'taclue:
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By lionofludesch
24th Feb 2024 16:22

I&#039;msorryIhaven&#039;taclue wrote:

Good idea... I could send them my mother-in-law.

[chuckle]

She'd probably make a better job of running HMRC.

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Replying to lionofludesch:
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By FactChecker
24th Feb 2024 16:35

And you thought trying to convince HMRC that they're wrong was tough ...

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Replying to I'msorryIhaven'taclue:
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By Hazel Accounts
27th Feb 2024 16:16

"I'm absolutely amazed btw that HMRC haven't picked up on the 2021-22 SA return which declared a £100k t/o, by enquiring about the lack of VAT registration".

I'm not - I also took on a client (Ltd Co in this case) who had filed 2021 accounts and Corp Tax return with turnover above £100k and not VAT registered and nothing from HMRC many months later.

One would have thought it's an easy check that HMRC software could flag up?

In my case I VAT registered them from correct time and did a 15 month VAT return (I think it was) and have heard nothing more from HMRC, possibly because they actually ended up with a VAT repayment.

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Replying to Hazel Accounts:
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By rmillaree
27th Feb 2024 16:25

to be fair to hmrc they are actively compiling data and sending out lettes now based on supplied turnover totals - so i suspect its only a matter of time before vat office come knocking all the more important to sort before that happens for obvious reasons.

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Replying to Hazel Accounts:
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By Beach Accountancy
27th Feb 2024 22:12

Could be making £100k of exempt supplies...

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