VAT Problems

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payrollpro
payrollpro Registered Posts: 427 Dedicated contributor 🦉
Has anyone had to deal with a client who is invoicing for work done but whose clients do not pay the VAT part of the invoice?

So far my client has issued about 5 invoices, all of which have been paid but net of the VAT charge and I have been asked to advise on what they can do about it.

What I have established so far is that HMRC don't seem to want to know, except that because payment has been made the supplier must account for the output tax as though it had been paid even if the payer has failed to do so. According to them the normal cash accounting rules apply even if the physical payment of VAT has not occurred.

It is up to the supplier to pursue the non payment of VAT, not HMRC. I have my doubts that my client will successfully sue their client because it's a large, multinational company he's dealing with.

It looks like he has to take the hit based on the VAT published on his invoices which makes the VAT rate much higher than 20%, or should he issue credit notes and then issue fresh invoices which assume the amount paid is inclusive?

Any ideas?

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  • Nikdoug
    Nikdoug Registered Posts: 69 Regular contributor ⭐
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    I'm not exactly sure, but thinking in terms of computerised bookkeeping for cash accounting, the invoice will get posted to the supplier account. Then when a payment on account is received against the invoice the VAT payable to HMRC will be calculated on the amount actually received I.e divide by 120 x 20. If you are not likely to receive the rest of the invoice then i would treat the remainder as a bad debt and calculate VAT thereon, therefore only paying VAT on the amount received.
  • Bluewednesday
    Bluewednesday Registered Posts: 1,624 Beyond epic contributor 🧙‍♂️
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    Do you know why the customer isn't paying the VAT? When this has come up for us, sometimes it has been because the customer has felt it was a zero rated job so we have had to credit/reissue the invoice, or they have just not realised that VAT is included and it was a mistake.

    I agree that the amount paid over for VAT should be inclusive and assuming you are cash accounting then payover 1/6 of what was received and credit the rest if it is a mistake or you are not going to get the VAT.
  • payrollpro
    payrollpro Registered Posts: 427 Dedicated contributor 🦉
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    Hi,

    Good points, to answer the second comments I think it is either because the payer is being bloody minded or they are just incompetent. My first consideration is how to force the payer, Hays, to do the job properly but apart from High Court action and the small claims stream I cannot see any way forward.

    I have advised that tax irregularities are actually actionable under the money laundering regulations but I cannot do a SAR because my client is only being affected by the irregularity and we can only report if it is our client who is in the wrong, am I correct?

    Thanks for the comment on the effect of cash accounting, that was my understanding but HMRC have said something different. Their view is that once payment is made the tax due is the amount on the invoice irrespective of the sum paid which the recipient is supposed to pursue as a civil action. The shortfall is not a part payment as such, their view, and therefore cannot be treated in the same way.

    I did wonder at that opinion, whether it was leaning too far one way.

    Interesting, and I agree, there is puzzlement both with me and the client as to why the payer consistently ignores the VAT requirements when payment is made. Is that a common feature of the agency self billing arrangements, or is this a new one?
  • Bluewednesday
    Bluewednesday Registered Posts: 1,624 Beyond epic contributor 🧙‍♂️
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    Looking at what Sage and quickbooks does, either these 2 big software houses are wrong or HMRC is! Definitely it has only paid over the VAT calculated on the payment - surely that is what cash accounting is all about - the VAT being paid over once the company has received the money.

    As far as I know it's not a self billing thing, we have self billing but the only deduction is retentions.

    Is the client in construction at all?
  • Monsoon
    Monsoon Registered Posts: 4,071 Beyond epic contributor 🧙‍♂️
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    Lets call the invoice £100 + VAT
    The customer pays £100 leaving £20 outstanding.

    If they are on cash accounting, then the correct thing is to pay over the output VAT element of a £100 gross. (£16.66). The balance remains unpaid and the extra VAT is never paid.

    If they are on standard accounting, then they have to pay the full £20 on the relevant VAT return and can claim back 1/6 of the bad debt (£20) in 6 months using bad debt relief.

    So either way, they are stuck declaring output VAT of £16.66 on the £100 received.

    HMRC will not accept (though I would be more than happy to be proved wrong) that the VAT remains wholly unpaid and the only sales receipt is the Net and therefore that no output VAT has been paid to declare to HMRC.

    If the invoice quite rightly includes VAT, and there was no confusion on the quote or contract, then I would take the client to the small claims court, regardless of who they are or how big they are.
  • deanshepherd
    deanshepherd Registered Posts: 1,809 Beyond epic contributor 🧙‍♂️
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    I think the fact the underpayment equates to the amount of VAT on the invoice is irrelevant.

    It's not a VAT issue, it's a debt collection issue.

    Send the boys round!
  • payrollpro
    payrollpro Registered Posts: 427 Dedicated contributor 🦉
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    Actually it looks like everyone is on their way to the negotiating table on this one. I agree with Dean and others, it is primarily an unpaid debt issue because the client has accepted the debt is owed, otherwise they would not have paid the net amount, so it follows that the only thing to prove is that the supply of service is taxable. No problem there.

    It is not CIS, this is professional services provided through a consultancy company and I think it is down to the company assuming the charges are supposed to be VAT inclusive and the worker assuming they are not. Not an uncommon problem I understand.

    As I mentioned, it is the attitude of HMRC which bothers me, even more so when you find, as above, that the systems will treat the actual payment only and not the deemed gross payment in its figures. This one will hopefully resolve itself tomorrow but to me the general principle of the true amount of VAT due to HMRC when it is not paid by the debtor for no understandable reason, remains for me.
  • Monsoon
    Monsoon Registered Posts: 4,071 Beyond epic contributor 🧙‍♂️
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    Deanshepherd: 5x as concise as Monsoon! :lol:
    payrollpro wrote: »
    I have advised that tax irregularities are actually actionable under the money laundering regulations but I cannot do a SAR because my client is only being affected by the irregularity and we can only report if it is our client who is in the wrong, am I correct?
    No I don't think you are. If in the course of work in the regulated sector you have a reasonable suspicion about anything that comes your way, you should make a report. It is not limited to just your clients, I do not believe. I am sure you can't get into trouble for making a genuine report about something that is reportable, even if I'm wrong about it being not just your clients!

    Think about it a different way: if you were in a client meeting and they say they were chatting to their neighbour on the left who was talking about making bombs from money received through a money laundering outfit, you would report it.

    If you want to make a SAR, then I would make one, if it were me. If you actually want something to be done about it, report the tax evasion to HMRC as this stands mre chance of being actioned than via SOCA. No guarantee HMRC will do anything but I think it's a better chance.
  • payrollpro
    payrollpro Registered Posts: 427 Dedicated contributor 🦉
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    I see the point, and it makes sense. Is that allowed on a Monday?

    It looks to me as if the twin threat of my client walking out of the assignment and comments about unlawfully withheld VAT liabilities may have done the trick, we'll see on Friday which is when they have promised to make all the payments up to date.

    Presumably we are in a position where we make the report, in one form or another, but there is no client to withdraw services from. Personally, I would go with Dean, send in the guys with the baseball bats. I used to know a debt collecter in the Thames Valley who was known as Colin NoNeck, I bet you can't guess why!!

    Next time I will give him a call.
  • Monsoon
    Monsoon Registered Posts: 4,071 Beyond epic contributor 🧙‍♂️
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    payrollpro wrote: »
    I see the point, and it makes sense. Is that allowed on a Monday?

    Nope! ;-)

    Glad to hear they may be paying up - that really is the main thing, it's a debt collection issue.

    I can think of a few people who may benefit from your pal Colin - I may ask for his number :lol:

    Agreed, if you report about a 3rd party there is no-one for whom you need to ask consent to continue to act, so it would just be a case of the SAR.
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