Hi,
Sorry if it is simple question but I have not dealt with it before and I need your help.
I admitted a client at end Dec 2017 who is sole trader. It is his first year of trade and his account period start Jan and ends Dec.
After inputing all his sales in computer, I found that he had to regsiter for VAT at end of May 2017. I contacted
HMRC and regsiter him for VAT. His sales Value after registration date is £100,000. HMRC told me that he is liable
to pay £20,000 VAT (100000 x 20%) on sale although he has not charged the customer VAT.
My question, is £20,000 VAT that has to pay is allowable expenses for the purpose of business tax? If yes, how should I class this as.
Many thanks in advance for your help.
Replies (38)
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1. If he had sales of £100k in 7 months, why did he not register sooner? Did he think that tax rules didn’t apply to him? [NB if his trade is a VATable trade that’s not obvious/straightforward eg is sales of hay bales, I withdraw this comment].
2. The £100k sales would be treated gross, so he’d be liable for £16,667 not £20,000. Just saved him £3,333.
3. When you say “I found that he had to regsiter for VAT at end of May 2017”, do you mean that he breached the threshold in May? If so, he didn’t have to register for VAT until 01 July. Not sure how much that cost him, hopefully less than the £3,333 saved in #2.
To answer your main question (ignoring the accuracy of the errors), you would show £80k of sales, being the sales figure net of VAT, due to #1.
If he went over the threshold in May he has to register from 1 July as he has 30 days to register. Looks like you can drop another month out. Also check out any VAT on the business purchase/set up and see if this can be reclaimed.
He has some purchases made during that one month early registration which can be claimed against the sales VAT.
Well, that'll also reduce his 5% penalty.
I would never allow HMRC to calculate my clients vat liability. There must be input tax to be set against the sales. Your client will have a heavy penalty for late registration so you need to ensure that you arrive at the correct liability.
What a muddle.
Firstly, what would happen if your client went back and charged £20,000 of VAT to his customers. If they are VAT registered business customers, they would have no reason not to pay as they can reclaim it. Obviously, if the client base runs into hundred of one offs this won't work very easily. If the customers are not VAT registered then they clearly won't pay up.
There will no doubt be some input VAT to reclaim which may lighten the load a bit.
If he absorbs the VAT it will be the £16,667 (less input VAT). This will be reported separately to HMRC in addition to the VAT return to enable them to calculate the penalty. HMRC are reasonable with this and I haven't actually seen a penalty when it is a voluntary disclosure. The £16,667 is effectively deductible for business tax as the reported sales will be £83,333.
Do also check the date that registration applies. It sounds like the business got off to a flying start if the VAT threshold was breached by the end of April. Hopefully the trade is still going well!
If they are VAT registered business customers, they would have no reason not to pay as they can reclaim it.
What are the rules about issuing VAT invoices in cases like this? If I were one of the customers I might be tempted to say, "Get lost. But since the price of your supply has now been shown to have included VAT, please provide me with a VAT invoice."
Not relevant here, but you can send a VAT only invoice covering all the post reg amounts for a particular customer. Yes, customers can say "Get lost" (and often do!) so best to sound them out before you do it. Seems to work OK in situations where the guilty party only has a handful of customers, all of whom are VAT registered, and they have a good working relationship.
I was thinking more of the scenario where, for instance, I was billed £10k. Supplier contacts me to say that HMRC have determined that he ought to have accounted for VAT on it, and would I mind if he sent me a VAT-only invoice for £2k. What happens if I say no? He will have to account to HMRC for VAT of £1,667, but the question is - does he then have to provide me with a VAT invoice (for £8,333 plus £1,667 VAT)? I'd much prefer to be able to claim £1,667 from HMRC than pay £2k to the supplier only to have to wait for HMRC to refund the same to me.
He wouldn't send you an invoice for £2k; he'd send you one for £12k, stating that £10k had already been paid. It would then be reasonable for you to say to the supplier that you will pay him the balance of £2k at the same time that you are due to pay off your next VAT return (as that will then be £2k lighter).
If he sent me one for £12k I'd send it straight back to him. You cannot send anyone a further invoice without agreement.
Untill 25 May 2017 his turnover was under £83000 by 31 May 2017 it reached £86000.
Thanks
I've no idea why you mention 25th May. You only have to do this sum at the end of a month.
He needs to register from 1st July. Given that you've applied 20% instead of 16.66666666666667% and got the EDR wrong, you may think it appropriate to take more detailed advice - or research.
The answer to your original question is yes - the VAT is allowable, any penalty is not.
On the wider question of recovering VAT from customers, my experience is that it's too much of a ballache unless you have only one or two customers involved.
To be fair, he didn't say that he's applied 20%, he said that HMRC did.
Also, I'll give him the benefit of the doubt and suggest that he is guilty only of some loose wording, rather than a misunderstanding of the rules. Ie, what he meant (and I accept that I am putting words into his mouth) was that the obligation to register for VAT arose at the end of May 2017 - he didn't say that was the EDR. Given that the liability has been based on turnover of £100k (it was £86k to May 2017) that would suggest that the EDR was indeed sometime later.
To be fair, he didn't say that he's applied 20%, he said that HMRC did.
True. But it was unchallenged.
And did the input VAT claimable for June exceed the output VAT payable?
Are you aware of the 6-month/4-year rule?
No it dose not.
I'm sorry.
I've no idea why you would want to register so early.
You say that there is a lot of input tax in June.
Then admit there was more output tax.
Hi,
I checked with the client he has purchased around £7000 including VAT 2 ovens. The purchase was made before he start the business, once he started the business then he start using them for baking host food.
There's nothing in there that helps us help you decide whether it was right to register early.
Obviously, you may feel you don't need help and, if that's the case, that's fine.
That doesn’t add much, as you’re missing the point that your client registered earlier than was necessary, which has probably cost him as a result.
He benefited from early registration becuase he had some purchases during month of Jun to claim those VAT.
I'm finding that hard to believe, based on the nature of your client's trade.
Thanks for comment.
"The answer to your original question is yes - the VAT is allowable, any penalty is not"
Do you say he has to pay the 5% penality from his pocket and should not be treated as expense?
Thanks
Yes. That's the general rule with fines and penalties.
Is there any input tax to reclaim ?
Fixtures and fittings ? Rent ? Kitchen utensils ? Packaging ? Other stuff ?
If you are talking about input VAT. Yes that sound alot. That include rent, Gas, Electric, Commissions, Telephone and raw materials that have VAT.
Jeez - it sounds like it's not worth him opening in June.
Time to take his holidays.
comment deleted. OP says 10k VAT input June to December, not Jan to May as I was thinking.
Does sound quite high still, given that two of it's major costs are food and wages
I have had some success in agreeing with hmrc to use the flat rate percentage for a late registration. You would need to do the figure to see if this would help.
I don't think there's a problem in principle in using the FRS.
Whether it's beneficial, we cannot say, as there's not enough information. However, the OP implies that there's a surprising amount of input tax to claim, which may nor may not be deductible under the FRS.