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VAT or No VAT?

Client not charged VAT when perhaps they should have. Is bad debt relief an option for them?

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A client is insistent that they did not need to apply VAT to some of their invoices but I believe they are incorrect. I am hoping they are correct.

They have chosen to use the standard VAT accounting scheme...

https://www.gov.uk/vat-record-keeping/time-of-supply-or-tax-point.

https://www.gov.uk/guidance/vat-guide-notice-700#section14

They are in the building / construction industry doing supply & install (e.g. extensions, renovations etc) and invoice at the start of the works such that they can take stage payments during the works. In the months prior to them becoming VAT registered they supplied estimates to their customers which had no VAT applied as they were below the VAT threshold and not VAT registered. The customers accepted those estimates. Some of the work began prior to the date of their VAT registration but they have invoiced after the date of registration. Some other work began after their date of registration but they are insisting that as the estimates were issued before the date of VAT registration that VAT does not need to be applied to the work they completed.

I am concerned for them as there is a potential VAT liability of circa£10k for the period (less than 2 months) within which they were VAT registered but were completing work that they had estimated for before their formal VAT registration date. A liability of £10k is not something they can afford.

It has been suggested they should invoice the clients including the VAT (post VAT registration date) and if the clients refuse to pay for the VAT owed then they may be able to claim that back under Bad Debt Relief...

https://www.gov.uk/guidance/relief-from-vat-on-bad-debts-notice-70018

From the builder's customers perspective who in their right mind would pay an extra 20% on works that had already started just because the builder became VAT registered during the works... The customers being home owners who cannot claim the VAT back. From the bulder's perspective going back to customers with revised invoices including VAT and asking for payment could loose you goodwill and future custom.

All advise appreciated from experienced accountants / agents. I could have advised better had the client come to me at the start but it is only when I came to complete the Corporation Tax returns that these issues have come to light. They want me to produce their VAT returns going forward (but I am concerned for them due to what happened during the circa 2 month period in question). Would really appreciate some advise from accountants / agents who have experienced similar situations with clients in the construction / building industry.

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24th Apr 2019 18:58

Whether the contractor can charge an additional 20% VAT where works continues after he has registered for VAT is a contractual question. Did the customer agree to a fixed price, or a price plus VAT 'if applicable'?
If the price was fixed then the contractor has to find 1/6th of the amount as output tax. The Bad Debt Relief rule will not give an advantage, as the amount to be relieved will be 1/6th only.
VAT does have to be accounted for on payments received after the date of registration: this is because of the tax point rules. VAT will not be due if the work is completed before the date of registration.

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