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Underpaid VAT

Underpaid VAT

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I have recently joined a small company as a company accountant.  While performing the reconciliation I have noticed that in one quarter, we underpaid VAT.  This was submitted by my predecessor.  My employer is experiencing severe cash flow problem and not in a situation to pay.  I am very concerned of my position as a member of a professional body.  I would appreciate if I could get any advice in reference to my options as well as my employer's.

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08th Jun 2013 17:12

How much?

If the error amount is under £10k make the adjustment on the next return. You want the return to be correct even if there are cashflow problems. You might be able negotiate payment terms but you can't negotiate what you enter on the return!

I'm assuming the error wasn't an attempt to defraud HMRC?

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to johngroganjga
09th Jun 2013 09:40

Thanks Andy.  There was no

Thanks Andy.  There was no attempt to defraud HMRC.  This error occurred because, the accruals of the previous quarter was not reversed. It is below 10K and I should be able to amend it through the VAT return. 

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By tom123
09th Jun 2013 09:57

How would accruals affect vat

Hello,

Just wondering how accruals would affect VAT - I don't normally record any VAT component on accruals myself,

 

 

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09th Jun 2013 11:57

Accruals cannot affect VAT

I agree with Tom - it is wrong to include VAT on accruals.

Accruals are, by definition, costs to be invoiced after the end of the accounting period.  If the (presumably) purchase invoice was dated after the end of the VAT quarter, it should not be included under the standard method of VAT accounting.  It sounds as if it was not the quarter in which the accruals were not reversed that was incorrect, but the previous quarter in which input VAT was claimed on accruals.

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09th Jun 2013 16:23

Not necessarily
Where ledgers are closed very soon after the month end it's quite common to receive say May invoices in the middle of June.
So by posting these invoices in June (May ledger closed) it would be necessary to 'accrue' for these invoices in the May quarter end vat return.
If this 'accrual' wasn't reversed in the following quarter then vat would in effect be claimed twice.
This was the case many years ago when working for a plc which closed the ledgers 4 days after month end.

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By tom123
09th Jun 2013 19:37

Interesting, @Kent

Interesting Kent, as the situation you describe is what we have every month.

ie we know exactly what invoices we want to accrue for - rather than just entering amounts for certain categories.

However, I am pretty sure we just accrue the net - specifically to avoid the possibility of double counting. We have had to make a disclosure about a duplicated claim of a few hundred k though (a few years ago), so we are maybe on the cautious side.

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10th Jun 2013 12:46

Close?

We do a similar thing (closing early, but accrue net) but if you are going to accrue (inc. VAT) then have you really 'closed'? Why not keep the ledgers open and close later?

Multiple closes always need lots of supervision...

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to lionofludesch
10th Jun 2013 13:29

You CAN claim VAT on invoices received after accounts closed

Why not put an accrual for the VAT through the VAT liability N/L code every quarter. Since you have to reconcile to this code every time you submit a VAT return you will see straight away if you've forgotten to reverse it. Keep a VAT reconciliation spreadsheet and get into the habit of using it. If you don't accrue for VAT on late invoices you are reducing your cashflow which can be critical for a small company.

Better still, if you're small enough, use cash accounting - you only pay VAT on sales and purchase invoices paid at the date of the return (apart from foreign invoices and invoices raised in advance of services or goods provided).

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By James26
13th Jun 2013 12:10

Accruals standard VAT planning

If you are of a substantial size you get a significant one off cash flow improvement but an ongoing piece of work for the VAT return preparer to make sure the accruals are substantiated.  If you stop doing it you then of course get a one off cash flow hit. HMRC would probably want to get comfortable that you aren't over egging it and including invoices that should have gone in the next return and it is just the ones stuck in the post/system etc.

Clearly you have to balance the cash flow benefit with the amount of tracking and time doing this.  That is of course why many large companies would do this whereas small firms would not bother.

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13th Jun 2013 12:26

Cash

@tom123 - I was responsible for one company in a group of about 20. Group turnover was £1.2billion and the vat saving each quarter was significant - £000,000's.

@James26 - yes was a big job but definitely worth it. Across the whole group the interest earned/saved by cash flow management was a separate profit centre which was extremely profitable.

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By Gilly
13th Jun 2013 13:41

Original question

The only thing I've seen work in the past was addressing the underlying cash flow problem. In my employer's case, cash flow difficulties were caused by a significant and unexpected (and uninsured) bad debt.  Our company contacted suppliers to requested extended payment terms on a temporary basis, including HMRC.  HMRC were helpful as we had a clean record up to that point, and we provided them with a payment plan, and stuck to it.  (It was a few years ago, and I don't know if things have changed.)  We spent a lot of time working on a cash flow forecast, which was closely monitored throughout the difficult patch.  The business itself was in a strong position politically, and had the staff, equipment and goodwill needed to survive.  Your company may not be so lucky, but maybe all is not lost.   If I were you I'd be looking at the cause of the cash flow problem and re-doing my forecasts.  Then work out if it can be overcome, and speak to your employer to plan a way out of trouble. If the company seems to be insolvent, that's a different conversation altogether.  It's hard work sometimes, good luck.

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27th Jun 2013 21:26

Accruing purchase invoices received after closing A/P subledger

Hi all,

 

Just noticed a sub-topic being generated here, re: accruing current month purchase invoices (e.g. May invoices in May) due to A/P subledger closure. Just wanted to highlight a small point:

 

Although in general we accrue net costs, assuming that the invoice will be dated beyond the current month, It would be ok in this instance to include the VAT adjustment with the accrual (i.e. accrue gross) as (i) the VAT registered entity would be entitled to a VAT reclaim of the VAT element at that point (ii) when the accrual reverses in the next month, the VAT on the accrual would net off against the VAT on the actual invoice when it is posted to the A/P subledger.

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