Q
This issue is regarding a small company’s VAT, we have been invoicing our clients since 01/08/2007 without applying any VAT on the invoices( some of our clients are VAT registered and some are not).
Today we have to pay £20,000 for the VAT, we want to know if we can reinvoice our clients with the correct invoices showing the VAT,(obviously our clients will not be keen on having a retrospective VAT invoice)
Or we will just have to swallow the cost of the VAT.
Any advice will be much appreciated.
A
Unfortunately there is no simple yes or no answer to your question about your company’s VAT bill and in fact I think that it is a matter of commercial law rather than VAT law.
So I would advise that you refer this matter to the company’s solicitor to get proper advice about the legal position.
But this is how I think it works:
First of all, I assume that the company has been registered for VAT since 01/08/2007 and this is why it has to pay VAT on income from that date.
There are a number of points that you need to consider.
What does the contract say?
I assume that the clients signed contracts or agreements or agreed to certain terms and conditions for the work/goods that were supplied. So to begin with, you should check what is said in these or any other documentation about VAT.
Treating the amounts as VAT inclusive
I understand that the normal position is that if the original documentation didn’t mention VAT, then the amount that is charged is treated as VAT inclusive.
This means that if the VAT rate is 17.5% then the VAT is calculated at 7/47 of the amount charged. If the VAT rate was 15%, for supplies on or after 1 December 2008, the VAT amount is calculated at 3/23 of the amount charged.
When you can add VAT to the amount originally charged
If the documentation says that the charges are VAT exclusive and VAT would be charged, then you should be able to add the VAT on top of the amounts charged.
As you know, you might find that the clients who are registered for VAT are willing to accept an additional charge for VAT on top of the amounts originally billed.
But do talk to the company’s solicitor – there may be other legal aspects to consider.
Other issues
A couple of final VAT points.
First, you are probably aware that the company is required to issue proper VAT invoices to VAT registered clients regardless of whether or not the VAT is included in the original amount or is added on top. This is so that the clients can claim the VAT on their VAT returns.
Finally the company may also be required to make a voluntary disclosure of the £20k as it exceeds the limit of £2,000 which can be included on VAT returns – see HMRC VAT Notice 700/45: How to correct errors and make adjustments or claims for information on this subject.