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Is there any way to avoid paying vat on this?

Is there any way to avoid paying vat on this?

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My client got a PO in Jan 10 for £100k - with a further deal of a couple of million - if all goes well.

He paid £15k straight out to a factory in China to start production.

Customer has since failed to pay the remaining £80k to complete production - so production halted.

Vat return now due - does my client have to pay the vat on the £20k - or is there any way he can pay vat on the £5k balance?

He has no money to pay the vat on the £20k - as this has been his only 'sale' this year - taking up all his waking hours! He is now trying to find alternative investors to complete this first stage of the project.

Or should he submit vat return showing vat on the £20k and then ask to defer payment to HMRC?

Replies (13)

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By Anonymous
02nd May 2010 09:34

Simple

Use the Cash Accounting Scheme

PC

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By tracy.sammy23.freeserve.c
02nd May 2010 10:06

How will that help?

He has no input vat records from his supplier in China - he would only get that when the goods arrive in UK - which doesn't look likely now.

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By Anonymous
02nd May 2010 10:22

Not so simple

Too early on a Sunday morning, and I completely mis-read the question - apologies. I was thinking of CA to defer paying VAT on the entire £100k, but of course that will not be invoiced until order complete (if that ever happens).

A couple of things to consider, then - you could apply to the Business Payment Support Unit - I'm pretty sure they'd be sympathetic to your position, and the amount involved isn't huge.

Secondly - could you consider the £20k to be a deposit? If the project fails to proceed, there has been no supply. Without a supply, there is no VAT chargeable. Without researching further, though, I have doubt as to whether this would work.

PC

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By tracy.sammy23.freeserve.c
02nd May 2010 12:17

Thanks PC. I think I might wait till Tues and then speak to HMRC. The submission was due on the 30th April - so am late now anyway. Was about to submit it showing the vat on £20k due - but was stopped by client asking the question if it was really due.

I guess it could be argued, like you say, as no supply was made - is it vatable?

Its made more complicated by the fact that 31.3.10 was his year end - so really need to get this vat return correct.

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By Richard Willis
02nd May 2010 12:46

Deposit idea no good

Contrary to the way that Sage deal with them (and they KNOW it's wrong!)(DIG), the receipt or invoicing of a deposit constitutes a tax point so VAT is payable thereon.

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By Anonymous
02nd May 2010 14:09

Deposits are not always liable to VAT

If a hotel takes a non-refundable deposit, which is forfeited because the customer has cancelled, there may have been no supply and therefore no liability to VAT. As I said, I'm not sure if the same argument would apply here - in the hotel case, the deposit became forfeit on the customer taking action to terminate the contract in accordance with the agreement.

PC

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By WhichTyler
03rd May 2010 19:13

Have they formally forfeited the deposit?

If so, when? if it was in the qtr, then no problem. If it was afterwards, adjust on the next return and talk to DMU in the meantime.

See forfeit deposits here:

http://www.hmrc.gov.uk/VAT/managing/special-situations/instalments.htm

And next time he'll remember to add VAT to the invoice for the deposit, won't he?

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By tracy.sammy23.freeserve.c
03rd May 2010 19:34

Not formally - no.

They are still trying to source 'an alternative investor'. They have found 2 'alternative investors' in the past couple of months- all of which have come to nothing - after reassuring my client that the monies 'will be paid soon'! This has been going on since Feb.

What does he have to do to get them to formally forfeit?

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By tracy.sammy23.freeserve.c
03rd May 2010 19:35

ps...

DMU??

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By WhichTyler
03rd May 2010 19:50

T&C

In the contract, does he have the right to cancel the order and retain the deposit if they fail to make the payments when due (subject to any breach terms)? If so it's a question of your client telling the (ex-)customer that they have forfeited the deposit and you adjusting on the next VAT return.

OTOH, if he he doesn't want to burn that particular boat just yet, has he actually invoiced them for the VAT on the deposit? They may be able to pay this smaller amount, especially as they will (probably) recover it from HMRC. Or has he had it & spent it, in which case it's more of his lookout...

 

Sorry DMU is/was the Debt management unit, which may be the same as the Business Payment Support Unit referred to above.

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By tracy.sammy23.freeserve.c
04th May 2010 07:41

Customer has paid my client the £20k

He invoiced them £17k odds plus vat back in Jan. The customer paid this - but then the same day - my client paid his supplier in China £15 to secure a slot in the production process. So the remaining £5k he has been using to live off for the past 3 months - and also travelling expenses back and forward to the far east/Germany.

 

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By Anonymous
04th May 2010 08:02

Sympathy is diminishing

If your client invoiced for £17k plus VAT, the VAT should have been set aside to hand over to HMRC in due course. Easier said than done, I know, but that's the way it is. Whereas income and corproation taxes come out of earned profits, VAT never belongs to the taxpayer so spend it at your peril.

PC

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By Anonymous
17th May 2010 09:29

What are the delivery terms?

What are the delivery terms for the contract? 

Were the goods to be shipped directly from China to the client or were they to be shipped to your client who would onward supply them in the UK?

If the former the supply would be outside the scope of vat and vat would not be due?

 

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