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VAT owed on strike off but HMRC refuse to collect

What to do about VAT owed to HMRC on winding up that HMRC won't recognise as being owed?

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Hi all

I have a client, who I prepare their year end accounts for but who handles their own VAT (small contractor).

They have correctly submitted their VAT returns, although in the past they submitted a return, got a receipt, but HMRC cocked something up at their end and so the debt is not showing at HMRC's end. My client has been open and frank with them and tried to get it paid but so far HMRC have not been able to sort it out (amount is between £3-6k (I'm being vague just to protect my client in public)). So the company owes this VAT, even if HMRC systems say they don't agree.

We are now in a position where we are winding up the company via the capital distribution route. What on earth happens to this VAT liability?

Ideally HMRC would accept this amount but they don't. (You read it right - we owe HMRC this money, we've told them both officially and unofficially we owe them this money, we have this money ready for them, but something at their end means that the can't recognise it, so we are a bit in limbo)

I can see a few options

  1. Recognise it as some sort of gain in the final set of accounts, pay CT on it and treat it as part of the amount to be distributed to the shareholders (I don't feel comfortable doing this as it is not a gain, other than as a result of the refusal of HMRC to acknowledge the money owed to them)
  2. Keep it as a liability, wait for HMRC to claim the liability as part of the winding up process. If the claim it great, if not then...?
    1. Treat it as a distribution to shareholders and taxed accordingly?
    2. Treat it as money held on trust for the wound up company to be settled??? (Not sure this is possible, or makes any legal sense)
  3. Maybe in the final VAT return make an adjustment so that the liability is now recognised and effectively ignore the previously filed/missing at HMRC's end VAT return

Obviously HMRC get informed of the winding up, and the company would need to be deregistered for VAT before then so they have plenty of opportunity to pick this up (as well as multiple conversations in the past of explicit "we owe you this money, please take it", type conversations).

What would you do in this situation? We only want to do the right thing and are not interested in finding a way to keep the money, but don't want the winding up to be indefinately put on hold whilst HMRC continue to not recognise the debt.

I'm tempted with option 3 but would not want to potentially incur a double charge.

Your thoughts and wisdom are welcomed.

Replies (27)

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By Roland195
08th Mar 2021 16:33

While being careful to skirt giving unregulated insolvency advice, I vote for option three as being the most pragmatic compromise between having the company pay the actual amount owed & not having the whole affair drawn out over an extended period waiting for action from the VAT office.

Provided you keep file notes of your reasoning this would keep you in the good lads club from my point of view. I expect you will be advised of the need for an AML report shortly though.

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Replying to Roland195:
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By paulwakefield1
08th Mar 2021 18:40

Roland195 wrote:

I expect you will be advised of the need for an AML report shortly though.

What on earth for?

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Replying to paulwakefield1:
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By Roland195
09th Mar 2021 09:23

Isn't that how these threads usually go? Practically everything is a Money Laundering issue (if not an ecumenical matter).

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RLI
By lionofludesch
08th Mar 2021 17:06

"Recognise it as some sort of gain in the final set of accounts, pay CT on it and treat it as part of the amount to be distributed to the shareholders (I don't feel comfortable doing this as it is not a gain, other than as a result of the refusal of HMRC to acknowledge the money owed to them)"

What makes you think they'll collect the Corporation Tax if they won't accept the VAT?

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Replying to lionofludesch:
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By Kylo Ren
08th Mar 2021 17:21

They've generally been collecting VAT and filing VAT returns. It was just one VAT return that was filed at our end, and somehow messed up at HMRC's end. Corporation tax seems to have been unaffected. Its not a problem with either the company in general, or with VAT in general, just with one specific VAT return.

We just want to do the right thing at this end but it is not proving easy to do it.

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Replying to Kylo Ren:
RLI
By lionofludesch
08th Mar 2021 17:39

You used to be able to make "conscience payments" to the Inland Revenue which would be acknowledged with some coded message in The Times.

I'm not sure whether HMRC have a similar facility. I've never done it myself.

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Replying to lionofludesch:
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By Kylo Ren
08th Mar 2021 18:18

Ha! It sounds all very cloak and dagger.
There's nothing underhand at all going on here. It's all above board, just administratively difficult. Whatever the right thing to do is, we'll do it!

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Replying to lionofludesch:
A Putey FACA
By Arthur Putey
09th Mar 2021 11:54

The late Michael Winner was going to leave HMRC money in his will to atone for past tax avoidance, but he changed his mind following an aggressive challenge to him claiming that his meals as a restaurant critic were allowable.

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My photo
By Matrix
09th Mar 2021 06:10

I don’t see what is stopping them from paying the VAT. You can write to HMRC enclosing a copy of the return which you say isn’t in the system.

If they send a cheque to refund then your client isn’t obliged to cash it and can close the company.

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Replying to Matrix:
blue sheep
By NH
09th Mar 2021 06:40

exactly what I was thinking - have you tried just paying it anyway? seems the most obvious thing to do

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Replying to NH:
RLI
By lionofludesch
09th Mar 2021 10:05

There's a good chance that it'll be sent back as an overpayment.

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Replying to Matrix:
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By Andy Reeves
10th Mar 2021 15:00

Why not send an electronic payment, and then immediately close the company bank account (after all other distributions have been made)? Then there would be nowhere to apply any returned funds, so the bank should send them back to HMRC, and the two organisations can sort it out between them.

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By sarahg
09th Mar 2021 08:21

Why don't they just send a bank payment for what they owe?

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Replying to sarahg:
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By Roland195
09th Mar 2021 09:36

The aim is to get HMRC to recognise they are owed the money in order that they don't attempt to repay it on de-registration and delay the winding up.

I'm not sure that not presenting the cheque would work in this case either as it would take them nigh on 6 months to realise that.

On the other hand, for some reason the VAT office never seem to get round to objecting to strike offs even where substantial sums are at stake so this may all be academic anyway.

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Replying to sarahg:
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By Cheshire
09th Mar 2021 10:12

HMRC will just sent it back if no liability is showing.

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By legerman
09th Mar 2021 09:38

4. If its showing as a liability on the accounts, pay it over and let HMRC sort their own systems out, keeps it tidy your end.

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Replying to legerman:
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By Cheshire
09th Mar 2021 10:14

Suggest its not showing as a liability which is why there is an issue.

Matrix has nailed it, cheque stapled to paper return is best chance, albeit a slim one in this day and adge of crass stupidity at HMRC.

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Replying to Cheshire:
RLI
By lionofludesch
09th Mar 2021 10:27

Cheshire wrote:

Suggest its not showing as a liability which is why there is an issue.

Matrix has nailed it, cheque stapled to paper return is best chance, albeit a slim one in this day and adge of crass stupidity at HMRC.

Well, you're assuming they'll present it.

And, until they do, the OP can't close the bank account.

Are you not better sending electronic payment and then closing the account before HMRC notice ? Or even just deleting bank details from the company's profile so that they can't send it back ?

Or - better still - send a cheque to your MP with a note saying "This is how low standards have sunk at HMRC - won't even accept money properly due to them."

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Lisa Thomas
By Insolvency Practitioner
09th Mar 2021 11:47

Why don't they just pay it and leave HMRC to sort the issue out/allocate it at their end?

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By Duggimon
10th Mar 2021 10:08

I vote for pay by bank transfer and shut the account before they can refund it.

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blue sheep
By NH
10th Mar 2021 10:25

in 19 replies no one has stuck their neck out and said - just close the company and not worry about it.

there is a 1% chance of HMRC ever coming after the client for it if that!

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Replying to NH:
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By Roland195
10th Mar 2021 12:08

There is probably less than a 1% chance of HMRC ever coming after practically everything we do for clients but keep quiet about it or we are all out of a job.

From what I can tell, your average client has more to fear from their regulated accountant than from HMRC in any event.

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By Ammie
10th Mar 2021 10:27

It looks like a straightforward case of an electronic payment or overpayment with the last VAT return and amend bank details on the company information so that there are none and so HMRC cannot make a repayment.

I wouldn't mess with writing it off or amending a different VAT return.

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By Kylo Ren
10th Mar 2021 10:47

Thank you everyone for your tremendous response. Some very sensible suggestions

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7om
By Tom 7000
10th Mar 2021 11:11

Send the money in. close the company. They cant send it back no bank account, all is done properly
Thats what I would do if I was the company owner.

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By unclejoe
10th Mar 2021 11:34

Am I the only one thinking that this is the sort of nonsense you get when computers take over the world and humans are rendered redundant? We really have reached a low when more human effort is required to sort out the failings of the computer than to do the whole thing manually in the first place. C'est la vie!

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By christina makhoul
10th Mar 2021 11:46

if i am going down a capital distribution route anyway i general write to HMRC and give them a statement from directors stating this intention and that company debts will be assumed by those receiving the capital distribution. this means that if the debt is still considered due down the line it is paid by them and the accounts reflect the potential for the liability.

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