Q:
Hi I’m a newbie at this so hoping I have posted in the right place. Was out for a meal the other night with various friends etc several of whom are sole traders. As always they manage to turn every conversation around to business when intended for pleasure! I was a little disturbed to hear that one has had shall we say “paperwork” issues for the past year and has only just found out that he is nearly £60,000 OVER the VAT threshold. Messing his pants doesn’t quite cover the way he’s feeling I think but in his conversation he had said that if he has to pay the vat on that back it would close him down. He mentioned that he had thought about closing the business completely, bank accounts the lot but re-opening new ones and opening a business under a new name. I believe his intentions are to keep his livlihood going to keep a roof over his kids heads but to then register the new named business for VAT.
I can see his concerns and really do feel for him in his situation hence why I am here to seek any advice as to what he can, can’t or should do.
Sorry I have dragged on a bit. Any advice to help this poor chap out of his desperate hole greatly appreciated. 🙂
A:
Hi
There are probably no easy ways of dealing with this and it’s one of those situations where the longer he leaves it, the worse it could get.
HMRC have lots of ways of identifying businesses that should be registered for VAT – his tax return will probably prompt queries and of course there are various penalties that can be levied for failing to register at the right time and these increase the longer the delay. But the penalties can be reduced if the taxpayer volunteers the information and co-operates with their queries or if there are good reasons for failing to register at the right time.
First he has to establish exactly how much VAT he owes. He might want to get a good accountant to help out with this as at the minute he’s probably doing back of the envelope calculations and maybe overestimating his liability.
I don’t know what sort of business he is in but if his business is taxable rather than exempt from VAT then he should be able to offset the VAT that he owes on his income by the VAT on his purchases and expenses (ie input tax), so he might not owe as much as he thinks. Also if his customers are VAT registered businesses, they might be able to claim back their own input tax, which means that he may be able to issue VAT invoices to collect the VAT from them rather than pay the VAT from his income.
As far as payment is concerned, HMRC may be willing to allow him some time to pay the arrears. It’s a long time since I had to negotiate a time to pay arrangement with HMRC on behalf of a client but I don’t think that they are in the business of making people bankrupt unnecessarily so they may well be amenable to some sort of payment arrangement. If he goes to them voluntarily then they are more likely to agree to this.
There isn’t any easy way of dealing with this but the longer he leaves it, the worse it could get. If he was my friend, I’d tell him to go to the VAT office with his records and get the ball rolling to sort it all out.
Marie