VAT Man - will he get me???

Lifeisbutadream

We have just had to go VAT registered (waiting for the forms to come back with our number as we speak).

Our turnover went to £72,000 last November, but I didnt realise until mid January. I told VAT man we would be going over in Feb, so started VAT from March 1st.

As our profit margin is between 25 and 30%, we hardly see any of the £72,000 - and there are 2 of us! I know that the VAT man does not see is lke that and does anyone know if they are likely to chase us for back-VAT??? if they do we will lose out big-time!!!! we dont even know where the money is coming from to pay our income tax yet!

would really appreciate some advice.

JasonLVC

If breaching the threshold is a one-off then you can request HMRC waive the right to registration but you'd have to explain why you'll be below the threshold from here onwards. If your business will always be over the limit from now on, then this is a non-starter for you. "If at the end of any month the value of your taxable supplies for the last 12 months has gone over the registration threshold, but you can provide evidence and explain why the value of your taxable supplies will not go over the deregistration threshold in the next 12 months, then you may not have to register. This is called exception from registration" - taken from HMRC Notice 700/1, section 2.2

If your turnover exceeded threshold in November then you should have notified HMRC preferably in October (30 days before hitting limit), or at best in November. However, what's done is done. HMRC are unlikley to know you registered late unless you tell them first, but more likely when they come and do an inspection, which is likely within your first year of registration (but not guaranteed) they will likely spot it then.

Where a person fails to notify his liability to register for VAT, he is liable to a penalty. This is calculated at 5%, 10%, or 15%, depending on the delay between the date of registration and the date HMRC received notification. 5% applies up to 9 months, 10% from 9 to 18 months, and 15% for a delay over 18 months. A penalty can be mitigated or cancelled in total if there are genuine circumstances which prevented the person from submitting his Application at the correct time. More details here - http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageVAT_ShowContent&propertyType=document&resetCT=true&id=HMCE_CL_001223#P4_29

They may also raise an assessment of output tax due to them for the period when you first became eligible to register (that is when you should have charged VAT to your customers). Of course, this also means you can recover any input tax (items you purchase in the furtherance of your business) you incurred from November onwards also - so this may go to offset your loss, depending upon your trade.

You can always raise invoices for the VAT you forgot to charge to your customers, but again, depends upon who they are. If memers of the public then you've got no chance, if other businesses then provided they are VAT registered too they'll likely pay up if you raise them a VAT only invoice.

It's a shame you could not have staggered some of your invoices so that they were issued later in the year, which whilst affecting your cashflow would move the time you hit the turnover limit later into the year.

Suggest you speak to your accountant as depending upon your business it may be easier for you to limit your annual turnover to below the VAT threshold or if you don't intend to be over the limit this/next year, de-register again.

Also, consider the cash accounting scheme over the ordinary VAT scheme as it has cash flow benefits for you and is easier to adminstrate (you pay over to HMRC when you get paid from your client, rather than at point you invoice client). Also, think about the flat rate scheme (you pay a fixed %, not 17.5% - you can't recover any input tax but is a single rate charge). Again, all depends upon your trade but may be better than the ordinary VAT route of paying output tax to HMRC even before you've been paid yourself. Do get some advice though.

JasonLVC

OP.

Sorry about the last post - I tried to keep it short, but it's a complex area.

Your options are be honest, own up and pay the penalty and back-dated VAT due. If yoe were my client, that would be my advise under the regulations that all accountants abide by.

Alternative is to do nothing, get registered and start charging VAT from March onwards. If you get an inspection the officer may notice you've registered late and apply the penalties at 5% (November to March = less than 9 months), plus any VAT you should have charged between November and March, then again, he may not notice. To be honest, you'll only be delaying the inevitable and whilst it may improve your current cash flow to pretend you were'nt aware, if HMRC suspect you've been trying to hide this fact, then they may also look into your personal tax affairs!.

Depends upon your personal situation and reaction to risk.

WHA

Don't forget to claim back all the input VAT on any goods for resale or equipment you have in hand as at the date of registration, and on services provided in the six months prior to registration. In most cases, claiming back this input VAT means that there is a actually a refund due for the first vat return, meaning that penalties for late notification won't be charged as they are due on the VAT due - if refund, no VAT due, so no late notification penalty.

JasonLVC

Good post WHA - whilst I briefly mentioned the ability to recover input tax you quite rightly note that if they recover more than they owe then no penalties are due as they'll be in a repayment situation.

Perhaps if the OP can buy a few laptops for business use and get the supplier to backdate the invoices to February, that may help!.

Lifeisbutadream

JasonLVC wrote:

If breaching the threshold is a one-off then you can request HMRC waive the right to registration but you'd have to explain why you'll be below the threshold from here onwards. If your business will always be over the limit from now on, then this is a non-starter for you. "If at the end of any month the value of your taxable supplies for the last 12 months has gone over the registration threshold, but you can provide evidence and explain why the value of your taxable supplies will not go over the deregistration threshold in the next 12 months, then you may not have to register. This is called exception from registration" - taken from HMRC Notice 700/1, section 2.2

If your turnover exceeded threshold in November then you should have notified HMRC preferably in October (30 days before hitting limit), or at best in November. However, what's done is done. HMRC are unlikley to know you registered late unless you tell them first, but more likely when they come and do an inspection, which is likely within your first year of registration (but not guaranteed) they will likely spot it then.

Where a person fails to notify his liability to register for VAT, he is liable to a penalty. This is calculated at 5%, 10%, or 15%, depending on the delay between the date of registration and the date HMRC received notification. 5% applies up to 9 months, 10% from 9 to 18 months, and 15% for a delay over 18 months. A penalty can be mitigated or cancelled in total if there are genuine circumstances which prevented the person from submitting his Application at the correct time. More details here - http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageVAT_ShowContent&propertyType=document&resetCT=true&id=HMCE_CL_001223#P4_29

They may also raise an assessment of output tax due to them for the period when you first became eligible to register (that is when you should have charged VAT to your customers). Of course, this also means you can recover any input tax (items you purchase in the furtherance of your business) you incurred from November onwards also - so this may go to offset your loss, depending upon your trade.

You can always raise invoices for the VAT you forgot to charge to your customers, but again, depends upon who they are. If memers of the public then you've got no chance, if other businesses then provided they are VAT registered too they'll likely pay up if you raise them a VAT only invoice.

It's a shame you could not have staggered some of your invoices so that they were issued later in the year, which whilst affecting your cashflow would move the time you hit the turnover limit later into the year.

Suggest you speak to your accountant as depending upon your business it may be easier for you to limit your annual turnover to below the VAT threshold or if you don't intend to be over the limit this/next year, de-register again.

Also, consider the cash accounting scheme over the ordinary VAT scheme as it has cash flow benefits for you and is easier to adminstrate (you pay over to HMRC when you get paid from your client, rather than at point you invoice client). Also, think about the flat rate scheme (you pay a fixed %, not 17.5% - you can't recover any input tax but is a single rate charge). Again, all depends upon your trade but may be better than the ordinary VAT route of paying output tax to HMRC even before you've been paid yourself. Do get some advice though.

Thank you for this. I am very worried now. I certainly arent trying to avoid payng tax - if we had it - they could have it! We are in our second year of trading and only just really starting to turn a profit (albeit a small one). It was a genuine mistake that I didnt spot that we were going over the threshold in November - I thought that you had until the end of the tax year and I didnt realise it was a rolling turnover and hadnt including the previous year as we ran at a loss then anyway. My mistake - but not intentional.

We definately cant go back below the threshold - we are very busy and have work booked in for months. Our customer are 90% members of the public. The reason that we went over is because we used contractors - so cant claim it back there either.

If they charge us VAT and a penalty we will obviously find a way to pay it as I dont want our business to go down the pan - I presume that we will be able to put our losses against income tax??

Lifeisbutadream

JasonLVC wrote:

OP.

Sorry about the last post - I tried to keep it short, but it's a complex area.

Your options are be honest, own up and pay the penalty and back-dated VAT due. If yoe were my client, that would be my advise under the regulations that all accountants abide by.

Alternative is to do nothing, get registered and start charging VAT from March onwards. If you get an inspection the officer may notice you've registered late and apply the penalties at 5% (November to March = less than 9 months), plus any VAT you should have charged between November and March, then again, he may not notice. To be honest, you'll only be delaying the inevitable and whilst it may improve your current cash flow to pretend you were'nt aware, if HMRC suspect you've been trying to hide this fact, then they may also look into your personal tax affairs!.

Depends upon your personal situation and reaction to risk.

Sorry - I didnt see this one before. Was only replying to ther other one.

My accountant has not advised us to to this, so am concerned about that. We seriously do not have the cash to pay a penalty AND the VAT!! It is not like we were accounting for that when we took on the work and deliberatly didnt pay VAT. We did not sell enough materials during this time to get much back there.

We have nothing to hide regarding personal income tax. Let em look! but I still dont really like having something like this hanging over me. When are they likely to investigate?

Lifeisbutadream

It also seems a bit unfair that the taxman is happy to penalise someone who made a genuine mistake and take more money than they actually have??

Approx figures:

Turnover: £72,000
Profit: £26,000 (for 2 people)
Income tax/NI: £9,500
After tax profit: £16,500 - £8,250 each
Hourly wage (each): £2.86

VAT if have to pay for back pay:

£3,202
+ 5% penalty (on £3202? ) = £160

(not sure about how much VAT we could claim back but it is nowhere near the above)

Therefore we will have to lose £1601 each of our £8,250 wage?? taking our hourly wage to £2.30.

Is there any way that they look at individual cases?? its not like we are VAT fraudsters!

Would look to hear from a taxman who can justify this?

greyteam1959

Dont take this the wrong way Lifesbutadream but if I were you I would take a long hard look at what you are doing and make some changes real quick before you are in the s**t.
To me your figurse just dont add up.
£2.86 per hour ?? unless you are directors of a limited company you a breaking the minimum wage law for a start.
Your should be getting more help from your accountant than you appear to be getting.
For a start you should be budgeting for ALL your costs ie PAYE / NI / VAT you must pay these on time or you start paying penalties.
Have you done a simple cash flow projection......bet you have not !!!
Sorry to be a bit negative but the number of small hard grafting businesses that get into big trouble the these sort of costs is unbeliveable.
Hope all goes well

Lifeisbutadream

mervyn11 wrote:

Dont take this the wrong way Lifesbutadream but if I were you I would take a long hard look at what you are doing and make some changes real quick before you are in the s**t.
To me your figurse just dont add up.
£2.86 per hour ?? unless you are directors of a limited company you a breaking the minimum wage law for a start.
Your should be getting more help from your accountant than you appear to be getting.
For a start you should be budgeting for ALL your costs ie PAYE / NI / VAT you must pay these on time or you start paying penalties.
Have you done a simple cash flow projection......bet you have not !!!
Sorry to be a bit negative but the number of small hard grafting businesses that get into big trouble the these sort of costs is unbeliveable.
Hope all goes well

How can we pay ourselves more than we earn?? how can we be breaking the law by not paying ourselves more than we get?? that doesnt make sense?

We have no emplyees so dont pay PAYE. We pay our own NI and tax when we do our tax returns. We have not even got our VAT number yet so havent paid anything there either.

Like I said before - we are only in our second year of trading - we made no profit last year at all - this is the first year we made a profit.

Sorry for not making much - we are trying!!!

I do all the budgeting myself - I just pay an accountant to help with the tax returns - I know how much profit we are making, but didnt account for VAT because I didnt fully understand it - hence the genuine mistake.

Dead_Eye_Jones

Lifeisbutadream wrote:

How can we pay ourselves more than we earn?? how can we be breaking the law by not paying ourselves more than we get?? that doesnt make sense?

im guessing he hadnt read it all through and didnt realise that was the figure you were getting!


off topic a little, but my missus gets paid less than the min wage by Surrey county council. Yep she's a teacher. Her wage slip even recognises the 100hrs a week she works (yep she really does) but her wage isnt even close to the £5.35 per hr min wage! The school system would go bust in a second... (not to mention the holidays she works through - when exactly do people think teachers mark the mountain of coursework and develop the next years schemes of work..)

So your not the only one legally on less than min wage...




Best of luck to ya, its a shame that setting up a new business has to be so tricky, but nuff respect to you guys, stick at it, sounds like it will work out in the longterm...