How to correctly declare a loss with regards toVAT

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United Kingdom

I have a stock item that has been lost. 

Would i be correct that i would declare the ex vat amount in my expenses and claim the vat portion on my vat return?

Can input vat be claimed on inventory that has been previously purchased for resale but has been lost?

I have a vat invoice for the stock item.

Replies (24)

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paddle steamer
By DJKL
22nd Feb 2023 20:57

You surely claimed the input vat when you purchased the item.

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Replying to DJKL:
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By Hugo Fair
22nd Feb 2023 22:01

You would've thought so - albeit that VAT may now be repayable if the item has now "been lost"?
I've no knowledge basis for that thought (but logic suggests it's no longer available for supply on a VATable basis) ... so hopefully one of the experts can correct me if necessary.

Of course this could be one of those examples where imprecise language by OP has got us chasing will-o'-the-wisps.
Are the 'expenses' mentioned a personal claim from employer or a classification in business accounts, and so on ...?

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Replying to Hugo Fair:
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By mil316
22nd Feb 2023 22:52

A classification in the business accounts "inventory".

No vat has yet been claimed. I don't bother claiming input vat until an item is sold.

The item was never sold thus no vat has been claimed.

Surely input vat can be claimed even though the item is lost?

If this isn't the case then I declare the entire value inc vat as an expense for the total loss of the item?

Or declare ex vat in expenses and input vat for the vat.

What is the correct way to record it?

I am recently vat registered and not an accountant but logic dictates one of these approaches should be correct. But obviously I could very well be wrong.

and no I don't currently have an accountant.

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Replying to mil316:
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By Wanderer
23rd Feb 2023 01:05

mil316 wrote:

and no I don't currently have an accountant.

Then engage one. You have already revealed that:-
a) You don't understand what you are doing.
b) You are making mistakes.
Who know what other mistakes you are making that may be detrimental to your business?

I've been reading the Taxes Acts for (too) many years and can't recall a reference to any VAT treatment based on what a taxpayer 'bothers' to do.

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Replying to Wanderer:
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By mil316
23rd Feb 2023 10:26

Wanderer wrote:

mil316 wrote:

and no I don't currently have an accountant.

Then engage one. You have already revealed that:-
a) You don't understand what you are doing.
b) You are making mistakes.
Who know what other mistakes you are making that may be detrimental to your business?

I've been reading the Taxes Acts for (too) many years and can't recall a reference to any VAT treatment based on what a taxpayer 'bothers' to do.

So in other words you don't know either.

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Replying to mil316:
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By Truthsayer
23rd Feb 2023 12:49

Wanderer does know, as does everyone who responds to your post, as this is a question that would not tax any first year accountancy student. You are making a fool of yourself by saying what you did. We are not here to give basic accountancy advice for free to those who refuse to pay for it.

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Replying to mil316:
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By Wanderer
23rd Feb 2023 16:19

mil316 wrote:

So in other words you don't know either.

Nope, not those other words at all! But it did make me smile that you are now advising me on what I do or don't know about VAT issues!
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Replying to mil316:
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By Yeadonian
23rd Feb 2023 12:01

If you don't bother claiming input VAT until an item is sold, you are not doing your VAT returns in accordance with the regulations. Even though you are actually harming your own cashflow, you should be doing things properly to avoid getting into trouble with HMRC.

You can make corrections of up to £10k on your next return, so I would recommend getting up to date and including all Input VAT paid on your next return if <£10k. If you are over this amount, you will need to amend your previous returns.

The input VAT on the lost item should still be claimable, as you should already have claimed it. There is no rule saying you need to repay this in the event of losing an item, although you should make a note of any lost items in case HMRC do an inspection and suspect that you are underreporting your sales.

The treatment for your accounts with regards to the loss will be a write off of your stock value on the balance sheet, which should be valued net (not including VAT). This will be an expense on your P&L and would normally be tax deductible, but I recommend getting an accountant.

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By Tax Dragon
23rd Feb 2023 05:48

If you bought and lost it before you were VAT registered, logic says it's not a VAT issue.

But I can't be bothered to look up the actual rules.

[Never have I felt more like a true Awebber!]

BTW, if you have a toddler, have you looked for the item behind the sofa or under everything it might fit under? Or inside anything it might fit into? Mine just loves putting things in things.

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Replying to Tax Dragon:
paddle steamer
By DJKL
23rd Feb 2023 09:00

You have my distant sympathy, the only usual advantage is that when you have them you usually are still young ,quick and agile enough to head off most of what, my late father would have called, their migrums.

However soon enough you will be endeavouring to persuade them that excess drinking is not a good idea (a School leaving prom and a ruined laptop or a dented diamond ring from a stumble spring to mind) and wondering why you only get visited when a free bed or borrowing the car is the main agenda item, so do enjoy the toddler bit, in hindsight it was possibly the highlight.

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Replying to Tax Dragon:
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By David Ex
23rd Feb 2023 10:29

Tax Dragon wrote:

If you bought and lost it before you were VAT registered, logic says it's not a VAT issue.

Good point. The novel method adopted may have wider “issues”!!

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VAT
By Jason Croke
23rd Feb 2023 09:35

https://www.gov.uk/guidance/vat-guide-notice-700
Paragraph 10 looks at lost goods, suggests that no output tax is due on the lost stock.

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By mil316
23rd Feb 2023 10:19

My question is whether I should be claiming input vat or not, not output.

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By CJaneH
23rd Feb 2023 10:34

There are only two methods of recording and claiming input VAT
1 Tax point - date of the purchase invoice(as shown on the invoice)
2 Cash point - date of the payment of the invoice.

Other than small corrections due to errors & omissions made that is the procedure.
Claiming input VAT when item sold is not a recognized procedure.

If registering after commencement of trade the VAT can be claimed on goods purchased before date of registration if you still have the goods.

You need to appoint an accountant and have some guidance on bookkeeping.

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Replying to CJaneH:
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By mil316
23rd Feb 2023 10:45

CJaneH wrote:

There are only two methods of recording and claiming input VAT
1 Tax point - date of the purchase invoice(as shown on the invoice)
2 Cash point - date of the payment of the invoice.

Other than small corrections due to errors & omissions made that is the procedure.
Claiming input VAT when item sold is not a recognized procedure.

If registering after commencement of trade the VAT can be claimed on goods purchased before date of registration if you still have the goods.

You need to appoint an accountant and have some guidance on bookkeeping.

If the vat was claimed at the purchase date would I be correct that this would now need to be repaid if putting to loss?

So I need to put the entire value including vat as an expense for the loss?

Also hmrc allow you to go back 4 years with regards to claiming input vat so why can't it be claimed when an item is sold instead of when it is acquired. I regularly liquidate stock and claiming all vat at the purchase point would require a tonne of paperwork at the liquidation phase chasing credit notes etc.

"Input tax must be claimed on a VAT Return within four years of the due date for the return period in which the supplier's tax point falls. If the Cash Accounting Scheme is being used, the point at which input tax may be claimed is the date of payment."

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Replying to mil316:
VAT
By Jason Croke
23rd Feb 2023 11:11

Because if you don't reclaim input tax at the time you incur it (invoice date or date you pay the supplier), then you are reclaiming VAT at the wrong time.....yes, you can still reclaim it sometime in the future, but that is then technically you reclaiming the VAT later than you should have, this is then an "error" and although errors do not need notification to HMRC if the net value of error is less than £10k per quarter, if you ever had a VAT inspection it'll look odd that you are regularly claiming input tax late.....no penalties or anything, but then it begs the question are you MTD compliant if you are reclaiming VAT at the wrong time (ie, are you entering the purchases into your records when you make the purchase/in the correct VAT quarter).

The 4 year rule thing is there to allow you to correct any mistakes historically, not to just reclaim VAT whenever you want as long as it is within 4 years.

Tax points are the backbone of VAT compliance. The section you pasted re. cash accounting, refers to tax points when using cash accounting, the tax point (time it gets recorded on the VAT return) is the day you pay for the stock items (input tax) and the day you receive payment for the goods (output tax).

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Replying to Jason Croke:
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By mil316
23rd Feb 2023 11:24

I have just looked over the literature regarding this and I am of course incorrect and what you have mentioned is correct. After reading I came to to the same conclusion that it can be done but is bad practice. So moving forward I will claim all input in the period a transaction is recognised.

Going back to my original question. Should I claim input vat on the lost item and put the ex vat cost as an expense or simply write off the entire amount including vat as a loss/expense?

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Replying to mil316:
Scalloway Castle
By scalloway
23rd Feb 2023 15:45

If the invoice for the lost item is within the period that can be claimed for going back then you can reclaim the VAT.
You do not need to account for the VAT on the loss.
If you are really worried just don't bother reclaiming the VAT.

Thanks (1)
Replying to mil316:
Stepurhan
By stepurhan
23rd Feb 2023 19:02

mil316 wrote:
After reading I came to to the same conclusion that it can be done but is bad practice.

No, it is not just "bad practice", it is wrong.

You have made a very basic mistake in accounting for VAT. That mistake is only coming to light now because a lost item of stock has resulted in you raising this question. How many other mistakes are you making because you don't realise anything is wrong?

Not hiring someone that understands these rules, and can tell you what is wrong early, is a false economy. Given the penalties HMRC can apply if you have messed up, it could prove much more expensive to carry on as you are.

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paddle steamer
By DJKL
23rd Feb 2023 21:01

The other issue is the havoc this might be causing to the accounts figures and maybe profit and loss arising from same.

If purchase invoices are what gets posted

Dr exp
Dr input vat ?
Cr PLCA

If this vat is posted but not claimed how does anyone reconcile the vat control account, sounds impossible or at least very difficult. So then nobody knows if the say vat debtor figure at any point is accurate, difficult to check (whereas if vat done correctly and quarter ends match year ends then vat control balance ought to match last quarter's vat return)

At least this will leave only difference in accounts on what was claimed and its timing re the vat account but otherwise accounts essentially correct but a mess. (Caveat, stock valuation at period ends could also be all over the place depending on what each item's deemed cost is in this knew novel accounting approach, fixed asset additions must be interesting re both allowances for tax and depreciation figures calculated, it is all getting a bit Schrodinger's accounts box with random timing as to when the input vat reduces costs)

If cash basis is being used

Dr exp
Cr Bank

Then only when sold

Dr Bank
Cr Sales
Cr output vat

followed by

Dr Input vat
Cr Expense.
re input vat on the original cost of the item sold.

This means expenses are overstated by the input vat until item sold, if this event crosses a period end then profits are incorrectly calculated re the period, catching the vat up over 4 years does not help this, potentially significant costs are overstated until the matched sale happens and the accounts are incorrect. Until the sale happens, profits are likely understated, not sure how happy HMRC will be re this if carrying stock is significant.

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Replying to DJKL:
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By Hugo Fair
23rd Feb 2023 21:46

".. this new novel accounting approach .."

I exclude 'non-accounting' (ignoring it or emptying a year's worth of bits of paper from the van) as a method ... but it's not often that we (or I anyway) come across a wholly different approach to accounting.

So I think it deserves it's own name - JIT Accounting (pronounced 'jitter' as that it what is gives me at the thought of trying to unwind the postings).

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Replying to Hugo Fair:
paddle steamer
By DJKL
23rd Feb 2023 22:33

It may be similar to the approach I used to see in my very early days, all accounts figures posted gross and the vat payments made treated as a single line debit balance in the P & L with a JE for year end liability.

I suspect this was a throwback to approach to accounting before vat existed subsequently modified for vat.

We had a few of these in the 80s but it was never satisfactory as fixed assets needed vat journals re input vat on additions to tidy.

But at least however woeful this approach was input vat was claimed as it arose, the OP's system is in a different league.

JIT does work as a name for the feeling it engenders however might it get confused with stock control approaches?

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RLI
By lionofludesch
23rd Feb 2023 23:38

I was out all morning and missed this cracker of a thread.

Very disappointed.

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Replying to lionofludesch:
paddle steamer
By DJKL
24th Feb 2023 11:01

There are obviously downsides to retirement.

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