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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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 ?
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.
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?
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!
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"
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.
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.
Actually bicycles in left hand drive countries are configured differently. Motorcycles are the same configuration but bicycles are in fact different.
Sounds as dodgy as a left handed bicycle.
"As dodgy as a left handed hockey stick" would be a better simile.
@ 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.
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
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.
This example gets it (edit: nearly) right and is pretty much your situation:-
If you exceeded the VAT threshold in the past 12 monthshttps://www.gov.uk/vat-registration/when-to-register
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.
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...
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.
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.
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.
I agree with No. An example of how following .gov. uk would lead to someone getting it wrong.
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.
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.
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?
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.
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.
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.
@ 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.
Hopefully not as Syd mentions nothing has come through so hopefully the client doesn't have his VAT number yet,
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.
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
Seriously - who knows ?
It's down to plain luck. Will your interlocutor know what he's talking about ?