What do you do if you don't have any VAT records?

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I am doing my first VAT return. My records are not great. I have no receipts supporting payments, so I am just not going to claim any input VAT, most of what I buy is cake ingrediants so there would be little to claim anyway, I am hoping HMRC will not be bothered by the zero input VAT claim. My problem is output VAT. My till system shows daily sales, but no further detail. I have no way of knowing the split between cake and say coffee sales. The VATable sales (occasional coffees and eat ins) will be a small proportion of sales. Is there a method by which I can estimate VATable sales, if so, please point me in the direction of the HMRC guidance. I will be updating my till system for future returns, it's just the first and part of the second I am going to have trouble with.

Replies (17)

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By David Ex
28th May 2024 13:43

You’re having problems because you (presumably) didn’t engage an accountant. You need an accountant.

https://find.icaew.com/

Other professional bodies are available.

https://www.accountingweb.co.uk/any-answers/how-to-use-any-answers

“If you intend to plan a course of action based on what you read in here, you should instead be taking professional advice.”

“They are not here to provide free accounting advice.”

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Replying to David Ex:
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By FactChecker
28th May 2024 13:53

Professional advice would have been (and still is) a sensible thing to obtain.

From the limited info provided, there are some obvious questions:
* if OP has next to no input VAT, then why didn't they opt for a flat rate scheme?
* if this is a new business, then why did they volunteer to register for VAT?
* ignoring VAT, without proper records (which is in itself breaking laws) then how does OP propose to prepare Accounts ... or calculate CT or IT or ...?
N.B: OP hasn't bothered to state whether this is as S-E or as an incorporated Co?

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By FactChecker
28th May 2024 13:55

"Is there a method by which I can estimate VATable sales, if so, please point me in the direction of the HMRC guidance"

No ... can't do the latter because it doesn't exist (so No to the first part too).

HMRC don't recognise the concept of 'estimating because we didn't bother to keep any records' ... in the absence of those records, their default position is to assume the worst (from your perspective) as in 'everything must have been standard rated'.

[I am making the massive if logical assumption here that you did actually register for VAT?]

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By Roland195
28th May 2024 13:56

I have to echo David here in that you need to speak with an accountant -I would have serious reservations if you should be VAT registered at all for one thing.

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By Jackie Howard
28th May 2024 14:08

OP here. My t/o is in excess of VAT threshold, so had to register. I was late registering. Last SA return was under the threshold, it was only when I looked months later I realised I had to register. My till tells me my daily sales amount, just doesn't split into VAT/zero VAT, never needed it to. FR no good for me as vast majority of sales are zero rated and I don't want to pay VAT on those. I just asked for a point in the right direction of guidance, gosh you guys are harsh.

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Replying to Jackie Howard:
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By David Ex
28th May 2024 14:33

Jackie Howard wrote:

I just asked for a point in the right direction of guidance, gosh you guys are harsh.

I’ve pointed you to appointing an accountant which is the only sensible way to proceed. Even if it was appropriate, accountants don’t give free advice on Internet forums any more than you give free cake and coffee to accountants.

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Replying to Jackie Howard:
DougScott
By Dougscott
28th May 2024 14:44

Yes people are rather harsh but then this forum is not really meant as a helpline for members of the public. If you are running a serious business and not a hobby then you need to take the law seriously and any serious business will have an accountant to advise it - not only should an accountant ensure your business doesn't break any rules but they should also save you money by maximising VAT reclaims, advising on different VAT schemes such as the flat rate scheme, show you how to keep proper records, save you incurring fines, penalties and tax investigations, etc.

Having been involved in a few HMRC investigations myself (which you don't want to invite by late registering etc!) then normally HMRC will accept the normal pattern of sales as applying to the period when there were no or incomplete records. So monitor your percentages of VATable and non-VATable sales now and apply the same percentage breakdown to the period in question.

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Replying to Jackie Howard:
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By Bobbo
28th May 2024 15:22

Jackie Howard wrote:

I was late registering. Last SA return was under the threshold, it was only when I looked months later I realised I had to register.

How long is the period for this first VAT return?

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Replying to Jackie Howard:
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By FactChecker
28th May 2024 15:27

"gosh you guys are harsh" ... don't shoot the messenger(s)!

You're getting lots of factual and practical advice to a problem of entirely you're own making ... and, nice though it would be, there is no 'band-aid' type solution that just involves saying sorry to HMRC.
Priority 1 is sort out your systems going forward (as in 'yesterday not tomorrow');
Priority 2 is appoint an accountant to ensure that your processes/records work both with your new systems and in meeting your legal obligations - and do this at the same time or with their help in tackling priority 1!

It's not that sorting out your missed historical returns are not a priority (they most definitely are), more that you need at the highest priority to stop digging the hole you're already in.
Otherwise you may find yourself like the captain of the small boat (leaking slowly in several places) who told a junior to solve the problem ... only to find the lad drilling holes in the bottom 'to let the water out'!

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Replying to Jackie Howard:
RLI
By lionofludesch
28th May 2024 17:06

Jackie Howard wrote:
gosh you guys are harsh.

Well, there's no poibt in saying "there, there, it'll be grand" because it won't be.

Flat rate might bail you out and let you sleep at night, even if it costs you more. Get your records in order and switch back to traditional VAT.

This is all a problem of your own making and, to be fair, you've admitted that.

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By kim.shaw-and-co.com
28th May 2024 14:29

Straight away you need to sort out your till recording system to accurately record sales subject to VAT versus sales that are zero-rated, in order that you can accurately report these in future. It is a system failure which has landed you in the position you are now in as regards historic sales. If you don't address this without delay after becoming aware of the failures in your record-keeping, HMRC are likely to take a very harsh stance with you in the event of a Compliance Check.

If there is no reconstructing 'actual' data for the composition of sales in past quarters you will need to estimate these based on average sales pattern(s) of zero vs standard-rated sales and make a return on the basis of your best estimate. This will of course likely be subject to challenge and close scrutiny in future in the event of a Compliance Check so if you cannot compile and retain persuasive evidence yourself you would likely benefit from professional support.

You would then revisit this to ensure it was representative once your accurately recorded sales are available to support the figures returned. If your estimate of standard rated sales looked to be too high you could potentially make a voluntary adjustment if the total VAT was within relevant adjustment limits for inclusion on a later return. Similarly, if you had likely under-estimated you would make a correction following HMRC Guidance here :

https://www.gov.uk/guidance/how-to-correct-vat-errors-and-make-adjustmen...

I would tentatively suggest that in the circumstances you initially err on the side of caution when estimating the standard-rated share of turnover given the numerous compliance failures outlined in your post.

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Stepurhan
By stepurhan
28th May 2024 14:51

Your records not being in good order was a problem when you weren't VAT registered. Now you are VAT registered, that is even more of a problem as you are required to have them in a format that allows submission under MTD (you can't just enter figures on the HMRC website). It is extremely unlikely that you are meeting this requirement, which is another reason for HMRC to come down on you like a ton of bricks.

If you don't take paid-for professional advice now, you are almost certainly digging the hole you are already in up to your eyes even deeper. Whilst you might get some pointers here to help with your immediate problem, that's a band-aid on what sounds like a broken leg.

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VAT
By Jason Croke
28th May 2024 15:27

Kim.Shaw makes some great points in their post.

In the absence of any physical evidence (till receipts, till records, etc) then you are going to have to estimate your output tax on your first VAT return. Your estimate will have to be based on a fair and reasonable basis and with supporting evidence.

You cannot just go with "The VATable sales (occasional coffees and eat ins) will be a small proportion of sales" as there is no science or logic to that, gut feelings will not work, so you could monitor the number of people buying coffees or sitting down to eat, over a couple of weeks and build up a profile of what your customers.

Your first VAT return will, absolutely, be verified by HMRC, so HMRC will be asking you to provide details of your sales and what split between zero and standard rated.

As you have no decent records, HMRC will be quite angry with you and may seek output tax at 20% on all of your sales or more likely HMRC may propose an apportionment which will be favourable to them (for example 60% standard rated and 40% zero rated), so having done your own monitoring - and evidenced this by writing down day, date, time, what customer purchased, whether they ate in or not, will give you a rough apportionment upon which to start negotiations with HMRC.

If you low ball this with no foundation, and HMRC disagree with you, then you will be on the hook for penalties (careless) and possibly even deliberate inaccuracy (as you have no basis as to what proportion of sales are zero or standard rated) plus on the backfoot in defending your position. If you high ball it, you could end up paying more output tax than you need to but lessen the impact of penalties once the true apportionment is known.

You should already have updated your till so that it can identify zero and standard rated sales because you will need to prove to HMRC that whilst your first VAT return might have seen you caught out by not knowing, your second VAT return will need to be accurate as you can only play the "I didn't know" card once.

Had you kept proper records from the start of trading, you may have built up enough evidence to truly prove your gut feeling that "VATable sales are occasional" and had you got that evidence you may have been able to seek exception from registration on the basis you mainly make zero rated sales and do not wish to reclaim input tax.

Some replies on here are harsh because the forum is not for people who think they can run a business and can DIY their own tax and accounting advice and then end up posting here because they've tried Google and realise they cannot in fact DIY their own tax and accounting, hence speak to an Accountant is the best advice here, as it seems you need one urgently.

That is why having an Accountant is such an essential aspect of being a business owner, sure you may save a few quid from doing it yourself and then there is Google and you're saving oodles of money by not paying for advice....but I've 27 years experience of dealing with SME's and multi nationals and I can say with certainty that I save all my clients money either in the short or long term (often both) and I would think almost any Accountant would be able to say the same because we know stuff that you do not and it is that stuff you do not know which is where the Accountant can add true value to any business.

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Replying to Jason Croke:
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By kim.shaw-and-co.com
28th May 2024 17:12

Jason Croke wrote:

Had you kept proper records from the start of trading, you may have built up enough evidence to truly prove your gut feeling that "VATable sales are occasional" and had you got that evidence you may have been able to seek exception from registration on the basis you mainly make zero rated sales and do not wish to reclaim input tax.

Everything above is spot on - and this is a key point the OP has totally overlooked when digging the hole that has clearly (likely unnecessarily) been dug. It now needs "digging out of" and HMRC are not there to find least cost solutions for taxpayers - their role is to collect taxes for the Treasury, so if you stumble into the "lion's den" what you need is a rope to help you out.

Such a rope isn't going to be effectively found by googling advice on the internet - it is going to be found by appointing an advisor qualified to bail you out in the optimal way based on the precise fact pattern. There is no point crying over spilt milk, and yes, there may initially be some fuel to the fire in terms of fees but at least OP will be supported moving forward and will hopefully avoid some of the many other pitfalls which are there to catch the unwary.

As @JasonCroke rightly says, in the long run a decent accountant (not a cut-price transaction processing centre) will usually save you more than they cost you, and are an asset of your business rather than a liability.

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JCACE
By jcace
28th May 2024 21:09

Hi Jackie
Well done for getting this far, for spotting that you needed to register for VAT, for recognising where you need help and for seeking that help.
Have a look at the advice given by Kim and Jason (experienced VAT specialist). You might also find it helpful to read VAT notice 727, particularly section 7 and notice 727/3. But also make sure you're completely on top of the VAT rules relating to catering (VAT Notice 709/1).
As for reclaiming VAT, I would be surprised if you had none to claim... no equipment purchased, no VAT on any property-related expenses, no advertising, no telephone, Internet, computer, stationery, packaging etc?

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Replying to jcace:
DougScott
By Dougscott
28th May 2024 23:38

Remembering you can reclaim VAT on some pre-registration expenditure gpoing back up to 4 years.

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By tom123
29th May 2024 08:01

What "till" system do you have currently?

You must have something.

Even a basic stripe terminal can let you set products up. You just need to set up two products, one for standard rated sales and one for zero rated sales.

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