Registering a New Business for VAT

Is there a way to avoid a VAT "penalty" as a new construction startup surpasses the VAT threshold ?

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Hi Everyone - I am really hoping someone can help out with this as its really troubling me !!

I am working with a newly established construction business. He has been going for just 3 months or so and I am in the process of setting up his Quickbooks and other processes. As I was doing this, it became clear that after two months or trading, he had invoiced just under £80k and that within the first week of month 3, he had surpassed the VAT threshold. The amounts he has invoiced are for a number of jobs (he has around 5 or 6 developments on the go at the same time) and some of these are ones where he quoted and started billing free of VAT and is still part way through the job and associated billing. He tells me he has round £50k to collect on these jobs. 

On speaking to HMRC the other day about his upcoming registration for VAT, I was told (unsurprisingly) that he would have to collect and pay over VAT on all invoices post his registration date. However, as some of these invoices are for work in progress where he has already quoted and part invoiced ex VAT, he has no opportunity to go back to the customer and say "sorry chaps but as I'm now VAT registered, you have to pay me £x extra" - the price for the job after all has been agreed. However, HMRC are insisting that he will therefore have to take that on the chin and account for VAT on those invoices too even though none has been invoiced and collected. In his case, the "penalty" could be as much as £15k - £20k which is pretty punitive given that its not as though anyone has tried to do anything wrong here !! Whilst I get the point that there may be VAT reclaimable on purchases made from that point going forward, in reality that will only be a small offset (Labour is the biggest cost and many of the materials were bought prior to the expected registration date). 

My question therefore is whether anyone has any experience of this sort of thing and is aware as to whether there might be an appeal that can be made or a special relief that can be claimed in these particular circumstances ? It just pains me that a taxpayer trying to do the right thing is getting penalised like this !!!

Thanks in advance for any help :-) 

 

Replies (46)

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RLI
By lionofludesch
03rd Aug 2019 11:25

Just how it is, I'm afraid.

He can reclaim any VAT on stocks still held at the registration date.

He needs to bill customers with an interim invoice for what he's done up to the day before registration. That part won't carry VAT.

What sort of construction is he doing ? Is it all standard rated ?

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Replying to lionofludesch:
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By Syd
03rd Aug 2019 12:20

Hi Lionofludesch,

Thanks for responding.

Yes - the vast majority is standard rated although there is one new build in there which will be zero rated.

I would have thought that anything he invoices out upto the date of registration will not carry VAT regardless will it (Inasmuch as the total turnover at the tax point is below the threshold ?)

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Replying to Syd:
RLI
By lionofludesch
03rd Aug 2019 12:24

Syd wrote:

I would have thought that anything he invoices out upto the date of registration will not carry VAT regardless will it (Inasmuch as the total turnover at the tax point is below the threshold ?)

That's what I said.

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Replying to lionofludesch:
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By Syd
03rd Aug 2019 12:39

Ok thanks - it was the bit about interim invoices that confused me .....

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Replying to Syd:
RLI
By lionofludesch
03rd Aug 2019 14:33

Yes - some jobs will be incomplete at the EDR.

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By Accountant A
03rd Aug 2019 11:41

Struggling to see how this individual is "a taxpayer trying to do the right thing"! Are you saying that he had no idea how much business he was likely to generate but by pure chance immediately started billing £10k per week?

It's a rather incredible story to have a new business starting from scratch making £40k per month from Day 1. What was he doing prior to his new venture?

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Replying to Accountant A:
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By Syd
03rd Aug 2019 12:23

There are plenty out there who never register for VAT snd operate under the radar until they get caught - at which point they declare the business insolvent and start again ! So in my books he is absolutely doing the right thing !!

Like so many people in the trade, he hadn't properly anticipated just how quickly the business would come his way (he knew it would eventually but not when.....) - the first month was relatively quiet but the second month has picked up quickly - plus he seems to be invoicing up front.

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Replying to Syd:
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By SXGuy
05th Aug 2019 09:09

Syd wrote:

There are plenty out there who never register for VAT snd operate under the radar until they get caught - at which point they declare the business insolvent and start again ! So in my books he is absolutely doing the right thing !!

Strangly, I read that as, he WASNT doing the right thing, and now he is, because he almost got caught. bit like being sorry after being found out, isn't it. And doing the right thing, would be to declare the income hes been hiding.

And sorry I don't buy the "he didn't realise" the first month he earned over 10k, would be the month he would know to register for VAT. VAT threshold is NOT a yearly thing, its a rolling month period, so anything over £7083.33 per month, would mean vat registration!

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Replying to SXGuy:
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By Syd
05th Aug 2019 09:27

Sorry am I missing something ? Individual has started trading 12 weeks ago - was under the VAT threshold and therefore had nothing to declare. Now that he has surpassed the threshold, he is registering....... I think you guys are just trying to make something out there that isn't . The only question is whether there is any VAT relief for jobs where he has already started billing and where (because he didn't have to) has not charged VAT (but will now have to pay it anyway).

So whilst I can see what you are trying to insinuate, I'm just trying to help a client with a genuine issue and this sort of response does not help.

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Replying to SXGuy:
paddle steamer
By DJKL
05th Aug 2019 09:35

Are you sure about that- it is rolling, adding the cumulative figures together ,but first month over £10,000 does not itself trigger an immediate registration requirement for a new business.

https://www.gov.uk/vat-registration/when-to-register

"Compulsory registration
You must register for VAT if:

you expect your VAT taxable turnover to be more than £85,000 in the next 30-day period
your business had a VAT taxable turnover of more than £85,000 over the last 12 months"

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Replying to DJKL:
Quack
By Constantly Confused
15th Aug 2019 08:17

DJKL wrote:

Are you sure about that- it is rolling, adding the cumulative figures together ,but first month over £10,000 does not itself trigger an immediate registration requirement for a new business.

I think(?) what SXGuy meant was that if you had a new business that was trading at that level (over £7,083/month) you would be on alert that they are likely to become VAT registered. Or maybe they didn't, now I type that I'm less sure what they meant...

Regardless, if I set up a business and was taking £10,000 a week, I'd be working on the basis I was going to be VAT registered very soon and quoting accordingly. But then I work in tax not construction, so VAT is never far from my mind, maybe the man on the Clapham Omnibus would think differently.

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Replying to SXGuy:
RLI
By lionofludesch
05th Aug 2019 09:48

SXGuy wrote:

Strangly, I read that as, he WASNT doing the right thing, and now he is, because he almost got caught. bit like being sorry after being found out, isn't it.

Got caught ? Doing what ?

Found out ? Doing what ?

i read it as a bloke who's business grew quicker than he expected.

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Replying to lionofludesch:
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By Syd
05th Aug 2019 09:53

Exactly and thank you !

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RedFive
By RedFive
04th Aug 2019 08:35

Sounds as dodgy as a left handed bicycle.

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Replying to RedFive:
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By Syd
04th Aug 2019 09:39

Why ?

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Replying to RedFive:
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By Wanderer
15th Aug 2019 05:11

Actually bicycles in left hand drive countries are configured differently. Motorcycles are the same configuration but bicycles are in fact different.

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Replying to RedFive:
RLI
By lionofludesch
15th Aug 2019 10:14

RedFive wrote:

Sounds as dodgy as a left handed bicycle.

"As dodgy as a left handed hockey stick" would be a better simile.

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By fawltybasil2575
05th Aug 2019 12:34

@ Syd (OP).

In intending no offence, I believe that there is a fundamental misunderstanding, on your part, of the registration regulations.

Your post at 09.27 today indicates that the business commenced approx. 13 May 2019. Your initial question indicated that the taxable turnover (approx. £80K for the first two months) was under the registration threshold, and that it has only been the taxable turnover for the third month (July 2019) which has resulted in the necessity to register.

Consequently, given the "month's grace" allowed by the legislation, the registration date would be 1 August 2019, only 2 days after your 3 August 2019 question. I cannot readily follow your reference (in that initial question) to:-

'the "penalty" could be as much as £15k - £20k'.

Have you perchance overlooked the above-mentioned "month's grace" ? - or possibly even thought that the registration date would have to be the start date of the business (given that it transpires that the taxable turnover has exceeded the annual registration limit) ?

Basil.
EDIT. Sorry: as Lion has stated below, the registration date is of course, after the "month's grace", 1 September 2019 ! Apologies, Lion.

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Replying to fawltybasil2575:
RLI
By lionofludesch
05th Aug 2019 12:23

fawltybasil2575 wrote:

Have you perchance overlooked the above-mentioned "month's grace" ? -

I think perhaps you may have, Basil.

Croosing the Rubicon in July would mean a VAT-free August and registration on 1st September 2019

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Replying to fawltybasil2575:
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By Syd
14th Aug 2019 19:19

Hi Basil ....

Thank you for your response to this. Im not sure I have fully understood your point so can you please help me out here ?

The data is as follows :
- Invoices raised in May = £28k
- Invoices Raised in June = £ £50k
- On the 4th July, he raises an invoice for £8k which takes him past the £85k threshold.
- He's going to invoice a further £50k in the next couple of months on the jobs that he has already started and partly invoiced for.

So - to my mind, he registers for VAT on July 4th (as that is when he passes the VAT threshold) and the £50k that he will subsequently invoice without the VAT (because he has already quoted for it) will now be subject to VAT (even though he hasn't collected any and cannot, given that he has already committed to a price with his customer - this is the "penalty" that I was talking about).

Is that correct or is there something else in the legislation that I've not understood ?

Thanks in advance :-)

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Replying to Syd:
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By Wanderer
14th Aug 2019 19:38

Based JUST on that without other considerations:
1. He goes over the VAT threshold in the month of July so
2. He must register within 30 days of 31 July and
3. Accounts for VAT from 1 September.
ignore the HMRC advice on .gov.uk, which you may have followed (as you mention 4 July registration) they've got it wrong. Look back at the legislation, which I have 'loosely' summarised.

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By Wanderer
15th Aug 2019 01:05

This example gets it (edit: nearly) right and is pretty much your situation:-

HMRC wrote:
If you exceeded the VAT threshold in the past 12 months
You must register if, by the end of any month, your total VAT taxable turnover for the last 12 months was over £85,000.

You have to register within 30 days of the end of the month when you went over the threshold. Your effective date of registration is the first day of the second month after you go over the threshold.

Example
Between 10 July 2017 and 9 July 2018 your VAT taxable turnover was £100,000. That’s the first time it has gone over the VAT threshold. You must register by 30 August 2018. Your effective date of registration is 1 September 2018.

https://www.gov.uk/vat-registration/when-to-register
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Replying to Wanderer:
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By Syd
14th Aug 2019 21:22

Thats great and thank you. So it sounds like my client has registered for VAT ahead of when he needed to then !! Do you reckon HMRC will let him change the effective date of registration is he gets back to them quick ? (He’s not had any paperwork come through yet ....)

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Replying to Syd:
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By Wanderer
15th Aug 2019 03:01

Yes it does sound like that.
I might be slightly concerned if i were you. On 3 August you referred to his 'upcoming registration' and now, on 14 August, it appears that the client is registered and may have been with an EDR of 4 July. Only you know the full facts of your involvement with this.
Whether HMRC will let him change his EDR I have no practical knowledge of, however from other answers I've read it may be an uphill struggle. It may be possible in your client's circumstances, have a read of this:-
https://www.gov.uk/hmrc-internal-manuals/vat-registration-manual/vatreg2...

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Replying to Wanderer:
RLI
By lionofludesch
14th Aug 2019 22:34

Wanderer wrote:

Example
Between 10 July 2017 and 9 July 2018 your VAT taxable turnover was £100,000. That’s the first time it has gone over the VAT threshold. You must register by 30 August 2018. Your effective date of registration is 1 September 2018.

Is that right ?

We have to check annual turnover every day ?

I don't agree.

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Replying to lionofludesch:
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By Wanderer
15th Aug 2019 01:04

Agreed! That example actually gets it wrong! For the OP's situation it is near enough, but it's actually wrong if someone has exactly the situation per the HMRC example.

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Replying to Wanderer:
RLI
By lionofludesch
15th Aug 2019 09:56

Here's an unlikely example.

Trader bills out £50000 on 10th July each year, nothing else for the rest of the year.

One year, he decides to go on holiday in mid July so he bills that year's sales on 9th July.

Does he have to register for VAT ?

HMRC example says yes. I say no.

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Replying to lionofludesch:
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By Wanderer
15th Aug 2019 10:19

I agree with No. An example of how following .gov. uk would lead to someone getting it wrong.

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By Wanderer
14th Aug 2019 19:47

This thread displays where HMRC got it wrong:-
https://www.accountingweb.co.uk/any-answers/vat-registration-date-1
They've updated their guidance since.

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By Wanderer
15th Aug 2019 03:20

OP
As highlighted already, this situation has probably arisen from a confusion as to exactly what the law is as to the registration requirements.
Not surprising really considering .gov.uk has got it so wrong more than once.
Always best to go back to the legislation. In this example case note particularly the words 'end of any month' in section 1 (1) (a) here:-
https://www.legislation.gov.uk/ukpga/1994/23/schedule/1
then read section 5 for the effects.

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Quack
By Constantly Confused
15th Aug 2019 08:22

So for the benefit of the OP and myself (as I'm now curious and always interested in developing my VAT practical knowledge):

Can the client who has quoted £100,000 for a job, payable at £10,000/month, part way through say 'actually it's now £12,000/month as I became VAT registered in the year'? I'm guessing it is the wording of the quote that will decide that?

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Replying to Constantly Confused:
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By Syd
15th Aug 2019 08:44

Hello CC

The difficulty here is going to be the likelihood of the customer insisting that he sticks to the original price he quoted - especially given that the end customer will not be able to claim any VAT back and so it will be a cost to them.

So what happens here (and HMRC confirmed this to me in a call), is that the builder will have to account for VAT on all invoices issued after the EDR irrespective of whether any VAT has been charged - effectively resulting in a penalty on on those invoices.

I think what this highlights more than anything (and earlier posts sort of say this) is that there is no substitute for planning ahead and keeping close tabs on what you are doing. Sadly, it is often the case (as here) that business people just focus on getting the sales in and don't necessarily see the importance of "technicalities" like this until it hurts - as it possibly will do in this case.

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Replying to Syd:
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By Matrix
15th Aug 2019 10:09

When you say penalty you mean your client has to pay 1/6 of his turnover to HMRC? This is not an HMRC penalty then.

Did he ask your advice on the tax point and the date of registration? I would certainly look into both and not handover the VAT until I had done so.

Don’t call HMRC for advice, if this is outside your comfort zone then pass to a tax expert or use tax helplines. I use the latter regularly to double check.

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Replying to Matrix:
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By Syd
15th Aug 2019 11:34

Hi Matrix,

Technically you are of course right - I guess it feels like a penalty because the builder quoted his customer in good faith and just hadn't twigged that other things he was up to would drive him over the registration threshold. So having now half invoiced some projects without VAT, he's not now going to be able to go back and charge VAT on the rest - but will have to pay it nevertheless.

Some might see that as "negligent" on his part (i.e. should have kept tabs and been aware). However, builders aren't tax or business experts and don't always seek advice when they need to. In this case, he was merrily billing away and only came to see me when one his customers asked him for a VAT invoice (it was for work on a zero rated new build). It was then that his invoicing history came to light and we discovered he'd passed the VAT threshold.

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Replying to Syd:
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By Matrix
15th Aug 2019 11:56

OK but don’t merrily do what HMRC tells you, check out the date he should have registered per all the above posts and check out the tax point before he adds VAT.

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Replying to Constantly Confused:
RLI
By lionofludesch
15th Aug 2019 10:01

Constantly Confused wrote:

So for the benefit of the OP and myself (as I'm now curious and always interested in developing my VAT practical knowledge):

Can the client who has quoted £100,000 for a job, payable at £10,000/month, part way through say 'actually it's now £12,000/month as I became VAT registered in the year'? I'm guessing it is the wording of the quote that will decide that?

You're right - "£100000" is not the same as "£100000 + VAT if applicable".

And with a contract of £100000 oer ten months, only a fool would not word it as the latter.

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By fawltybasil2575
15th Aug 2019 12:14

@ Syd (OP).

To answer a question above by you (at 21.22 on 14 August 2019) HMRC will probably, in these circumstances, accept the withdrawal of the registration application (if they do not, then your client should pursue the matter, subject to my comments in the paragraph below commencing “In short”).

It is probable that the withdrawal of the registration application is beneficial (again see however my paragraph below starting “In short”).

You have referred above to the “end customer”: is that customer one and the same as your client’s customer?

The position re the period (in your client’s case) 1 August 2019 to 31 August 2019 is potentially crucial, in terms of several factors including (i) the legislation [the legalities are often misunderstood (by taxpayers, agents and HMRC alike)] and the (ii) the “PRACTICAL” steps which your client could take (in terms of timing of invoices, timing of obtaining monies from customers, possible re-arranging terms with customers etc etc).

I too, as Wanderer has alluded to above, am very concerned for your own position, given that on 5 August 2019 (at 09.27) you indicated that your client “is considering” a registration; but you have now advised that the registration HAS BEEN effected [clearly at some point on, or probably after, 5 August 2019, even though I had advised you on 5 August 2019 (at 12.34) that the compulsory registration date would be 1 September 2019 (in the “EDIT” to my post). Your client may be “asking questions” of you as to why you did not inform him of the CORRECT compulsory registration date, since you were clearly in contact with him re the registration position, even if he submitted the application form himself).

I could ask “ 7 or 8 questions” in order to guide you further, but those answers would lead to further and further questions: such is not the way forward for you and your client.

In short, and as matter of URGENCY, you should NOW seek the guidance of a VAT SPECIALIST, in the interests of both your client and yourself (I would ask you to consider my paragraph above commencing “The position” if you are in any doubt).

Basil.

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By Syd
15th Aug 2019 12:48

Hi Basil,

Thanks for the response.

So my client is a building contractor who does work for the general public (end users). He's only recently set up in business (June 2019) and didn't at the outset indicate how quickly he might invoice and therefore pass the VAT threshold.

As you say, he came to me in early August (when I originally asked the question in this forum) when he was being pressed by a customer for a VAT invoice (as explained in an earlier post). The invoice that took him past £85k sales was issued on 8th July.

For this reason, his VAT registration was effected from this date.

Now that I understand that my understanding of the rules was in fact incomplete and that even though his turnover is significantly in excess of £85k now, the rules would appear to allow him to become VAT registered from 1st September - almost 2 months later.

Given that this will indeed make a significant difference, I've been on to HMRC this morning and they have advised that I ask for a change via form VAT484 - this has now been done and I guess we'll just have to see.

So yes, I guess it's a bit unfortunate that a misunderstanding of the details of the legislation have made what should have been a straightforward task into a complicated one. However, if I have now understood you all correctly, this ought to be fixable and our case is a good one (inasmuch as all we are asking for is for the rules to be applied in accordance with the legislation).

I'll keep you all posted on the outcome.

Thank you all for your help -its been truly invaluable

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Replying to Syd:
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By Matrix
15th Aug 2019 13:04

Has he raised VAT invoices in the meantime?

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Replying to Matrix:
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By Wanderer
15th Aug 2019 13:06

Hopefully not as Syd mentions nothing has come through so hopefully the client doesn't have his VAT number yet,

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Replying to Syd:
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By Wanderer
15th Aug 2019 13:04

As well as the VAT 484, or as an appendix to it I'd suggest that you cover off all the points in the link that I gave you.
https://www.gov.uk/hmrc-internal-manuals/vat-registration-manual/vatreg2...
From what has been said the early registration was effectively voluntary, backdated, a genuine misunderstanding and this request is made in time.
Basically make it easy for whoever picks the case up to agree to the request. I would probably also print out and attach VATREG25350 and maybe refer to it in the submission.

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Replying to Wanderer:
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By Syd
15th Aug 2019 15:07

Exactly my plan !!

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Replying to Syd:
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By Matrix
15th Aug 2019 13:18

OK so if the VAT registration number has not yet come through then get this agreed by phone by speaking to the VAT registration team. This is urgent and I wouldn’t wait for a paper form to be processed (how do you complete a 484 without a VAT number?).

I put the phone number on this thread but have not used it for a while. If no luck then I will see if I have others as I tend to write them down when they work:

https://www.accountingweb.co.uk/any-answers/vat-registration-follow-up-call

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Replying to Matrix:
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By Syd
15th Aug 2019 15:11

So we've just checked on-line and a VAT number is now showing against his account (although he's not formally had the notice in writing). As you say, we did speak with them (as a matter of urgency) this morning and they suggested filling in the VAT 484 - I guess I could give another call and try and speak with someone else ? (the person I spoke to this morning didn't seem that knowledgeable .... )

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Replying to Syd:
RLI
By lionofludesch
15th Aug 2019 15:29

Seriously - who knows ?

It's down to plain luck. Will your interlocutor know what he's talking about ?

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By Syd
16th Aug 2019 11:56

Hi everyone,

First of all, May I thank everyone for their positive and useful contributions to this - it really has been very helpful and thank you all.

As a final postscript, I thought I should just update you all on where this has ended up so that anyone else reading this series of posts can get something out of it too.

1) I spoke with HMRC's registration unit today and they confirmed that advice that a few of you have offered - i.e. that in the situation where you discover that you have passed the VAT threshold recently, you must apply to register within 30 days of when you passed the threshold and the effective date of registration is THE FIRST DAY OF THE SECOND MONTH AFTER you pass the threshold. In my case , my client passed the threshold in week 1 of July. The Effective Date of Registration will therefore be September 1st.

2) Because my client has already registered for VAT from 1st July, the Registration Unit said we could apply to get the date amended to 1st September and that it would be fine to do so. I just need to write a letter explaining everything to the EDR Team in Grimsby (Its a special unit that deals only with registrations).

3) This gives my client a couple of weeks grace therefore to invoice out stuff that he cannot charge VAT on and get his affairs into order before he has to apply the full VAT regime.

4) EDR Unit Address
(Registrations only and not general VAT queries)
EDR Team,
HMRC,
Imperial House,
77 Victoria Street
Grimsby
DN31 1DB
Tel :- 0300 322 9064

Finally, HMRC can be as unclear and confused about this as the rest of us - I rang them 4 times and got 4 answers - it was only when, prompted by some of the posts from the contributors on here, I rang the Registrations unit (HMRC gave me the number BTW) that I actually received the clarity I needed. I think theres a bigger moral in there somewhere !

So it looks like it going to be a happy outcome all round. Thank you all once again for your help and if I sound a bit relieved, its probably because I am :-)

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