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The VAT Trap

The VAT Trap

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I know this subject has been touched on before on this forum but I would welcome views on a particular situation which must, I think, crop up quite often.

A company formed a couple of years ago realised after about 8 months of trading that they were approaching the VAT threshold so applied for VAT registration. They anticipated that the threshold would be met in May so in early April they applied to register with effect from 1st May.  What happened next is the reality of life - bad timing (maybe) and the law of unintended consequence.

in mid April they had news that a project that one of the employees had been working on (that was only ever given a low chance of coming to fruition) had actually turned out to be successful and agreement was reached with their customer that they could raise an invoice for about £20,000.  This invoice was issued in April but, being before the registration date of May 1st had no VAT added.  The money itself was received at the end of June.  Because it related to an invoice that pre-dated the VAT registration date and with no VAT, this sale was not included in the VAT Return that included June.

I'm now preparing the annual accounts and I am questioning whether there is, in fact, a VAT liability of £3,000+ for the company as a result of this invoice.  If we add this sale to the sales for previous months it puts the total sales well over the threshold and I am thinking that, but with only the benefit of hindsight,  this could mean that the actual registration date should perhaps have been a month earlier. 

So, does the fact that the actual total of their pre-registration sales turned out to be well over the threshold mean that there is a VAT liability here even though registration had been sought on the basis of actual sales up to that point?

Secondly, if so, the customer who paid the £20,000 are themselves VAT registered (and still trading) so HMRC are not actually out of pocket.  Therefore, is it possible to put this right by agreeing a (legal) way in which the company can now seek the VAT from their customer, or by notifying HMRC of the circumstances, or both?

Or, does the fact that the invoice was raised between the registration application and the registration date mean that it is VAT exempt regardless?

If it turns out that there is a VAT liability as a result of this invoice it would seem that the company has been caught in a VAT trap whereby they registered in good faith an in accordance with the rules but find themselves out of pocket because they were unable to raise a VAT invoice in April?  

Answers gratefully received.

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By Wanderer
18th Feb 2015 07:55

Over thinking

Think you are over thinking this one.

If you actually go over the threshold in a particular month, you register within 30 days of the end of that month & are liable to account for VAT from the 1st of the following month.

e.g Over in July, register by 30 August, account for VAT 1 September sales on.

It's actually quite easy to be in the situation of sales £120,000 + before you need to actually account for VAT.

Not sure why your company would register early April & account for VAT from 1 May.

If they actually went over in May then they register by 30 June & account for VAT from 1 July sales on.

Perhaps whoever made the decision to register didn't understand the rules and / or confused the normal rule with the anticipated future turnover rule?

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By Springfield
19th Feb 2015 09:07

Thanks very much for this.

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