Q:
I am a sole trader who unwittingly exceeded the threshold in June 2008 ( I thought that the threshold ran from tax year to tax year not 12 months consecutively). I have been told to register from June 2008.
I need to know can I send retrospective VAT invoices to clients dating back to June 2008 or am I only able to do this for this tax year? Am I liable for the VAT payments even if I am unable to collect them?
Any help greatly appreciated!
A:
Hi bradwray
I’m sorry to hear that you got stung by not understanding the VAT registration rules – believe me you aren’t the first and won’t be the last.
Unfortunately I can’t provide a simple set of guidelines for your situation as the technical issues involved are actually complicated and there are a number of factors other than the main ones about whether or not you can issue VAT invoices or whether you have to pay the VAT even if the customers don’t pay you.
This is one of those situations where I would really recommend that you take professional advice – not just on the historic VAT issues but on your overall VAT affairs. I’d be happy to advise you subject to my usual fee arrangements, but it would probably make more sense for you to ask your accountant as he will be able to deal with all of your business issues, not just the VAT ones. You could also go along to your local VAT office and ask them for more practical advice, they will help but they simply may not have time to take you through all of the technical issues.
I’ve set out some general comments on the subject below, including the 2 main points though that you raised in your query.
Can you issue invoices for the VAT?
This is really an issue of contract law rather than VAT law so you might want to ask your solicitor for advice on this. In fact if your customers are VAT registered businesses then you are obliged to issue invoices so that they can claim the VAT back on their VAT returns.
The VAT issue really is whether the original contract/terms and conditions states whether or not the original fee was VAT inclusive or VAT exclusive. Normally if it says that the charge is exclusive of VAT, you would be able to charge VAT in addition to the original fee. If not you’d have to treat the original fee as VAT inclusive, unless your customers agree to pay additional VAT on top of the fee. So first of all you need to know what it says in the contract/terms and conditions.
Do you have to pay VAT even if the customer won’t pay you?
The answer to this is yes in principle, but the amount depends on how much the customer actually pays you.
The VAT law says that you, the supplier, have to pay VAT on the “consideration” that you receive, ie the amount received from your customer. So that means that you have to pay VAT based on whatever payment you’ve received OR if you’ve issued a VAT invoice to the customer for a higher amount.
The issue here is whether the amount you’ve already received is inclusive of VAT because the customer won’t pay any additional VAT on top of the original fee.
The effect of this is as follows:
Assume the fee is £100.
If the fee is VAT exclusive, the VAT at 15% would be £15, at 17.5% would be £17.50.
If the fee is VAT inclusive, the VAT at 15% (ie £100 x 3/23) would be £13.04, at 17.5% (ie £100 x 7/47) would be £14.89.
So the difference between the fees being VAT inclusive and VAT exclusive is as follows:
• If the VAT rate is 15%, the difference is £15 – £13.04, ie £1.96.
• If the VAT rate is 17.5%, the difference is £17.50 – £14.89, ie £2.61.
So if you issue an invoice for VAT at 15%, ie £15, you’d have to pay HMRC the VAT of £15 to begin with. The total consideration for the supply in question would be deemed to be £115 as you’ve issued a VAT invoice to your customer, so your VAT liability is £115, ie the VAT is £115 x 3/23, ie £15.
However after 6 months, you should be entitled to claim VAT bad debt relief as the customer hasn’t paid the additional £15. So you’re entitled to claim the VAT difference between VAT on £115 and £100,which as shown above is £1.96. The rules on VAT Bad Debt Relief are here on the HMRC website: http://tinyurl.com/lpzzmu
So as you can see, it gets quite complicated and messy, which is why I think that you would be advised to take advice on the subject to help you sort it out properly. You don’t want to end up paying too much VAT or too little VAT now and ending up having to sort it all out again in a couple of years if the VAT office sends out an officer to do an inspection.
Other issues
And before you do anything in terms of issuing invoices, there are some other important factors that you should consider that could help you minimise the costs.
First, there are various schemes for smaller businesses which may help you to reduce your VAT liability and/or help with cashflow regardless of whether you issue invoices for additional VAT – these include the Flat Rate Schemes – see here on the HMRC website for further details http://tinyurl.com/2lgp37. Also the Cash Accounting Scheme which gives you de facto Bad Debt Relief as you only pay (and claim) VAT on the basis of when payment is made, not when the invoices are issued. See here on the HMRC website for further details: http://tinyurl.com/qj4u63. One or other of these schemes could be very helpful to you.
Second, bear in mind that you can also claim back VAT on costs incurred since the new date of registration.
These are the main ones but there may be others and I’ll add an additional post on here if I think of anything else important.
I hope that you manage to get this sorted out without too much hassle and that you can keep any additional VAT liability down to a minimum. In particular have a look at the Flat Rate Scheme as that could save you a lot of time and may reduce your overall VAT liability regardless of whether or not you issue additional invoices and/or the customers pay.
Kind regards
Marie