Is VAT chargeble here?

JodieR

Ltd Co client has a well established web-based business. They use the flat rate VAT scheme. For the last year there's been someone else (Mr A) interested in using their business model to run a similar business. My client has spent a lot of time customising the website for him, but as he's busy with his other work he's never put in the time he needs to to get the project off the ground. The original plan was for him to set up his own Ltd Co and operate independently from my client (under some form of franchise agreement), but this hasn't happened yet.

Both my client and Mr A agree that Mr A needs to pay my client something for the extra work they've done for him, please can someone help me with the implications of them:

a)My client invoices Mr A for the work done. My client would account for the VAT on the invoice. Would Mr A be able to claim this as pre-trading expenditure if/when he does set up his Ltd Company?
b)Mr A loans money to my client for now, and when he does set up his Ltd Company then an invoice can be raised. Would this be allowed?
c)Mr A pays one/some of my clients supplier bills (ie the google advertising bills for a few months). They came up with this plan as a way of getting around charging VAT, but I'm sure that they'll still need to account for VAT on the transaction, I just can't find anything to substantiate this.

Hope someone can help.
Thanks
Jodie

mentorkeith

Without looking into it in great detail, I can definitely answer qu.1 by pointing you to what HMRC say on the issue. You will be pleased with it. Please read http://www.hmrc.gov.uk/vat/start/register/purchases-before.htm

To me qu.3 seems to throw up ethical questions. it doesn't sound ethical to me, so I will not encourage it by answering it.

reader

JodieR wrote: »

Ltd Co client has a well established web-based business. They use the flat rate VAT scheme. For the last year there's been someone else (Mr A) interested in using their business model to run a similar business. My client has spent a lot of time customising the website for him, but as he's busy with his other work he's never put in the time he needs to to get the project off the ground. The original plan was for him to set up his own Ltd Co and operate independently from my client (under some form of franchise agreement), but this hasn't happened yet.

Both my client and Mr A agree that Mr A needs to pay my client something for the extra work they've done for him, please can someone help me with the implications of them:

a)My client invoices Mr A for the work done. My client would account for the VAT on the invoice. Would Mr A be able to claim this as pre-trading expenditure if/when he does set up his Ltd Company?
b)Mr A loans money to my client for now, and when he does set up his Ltd Company then an invoice can be raised. Would this be allowed?
c)Mr A pays one/some of my clients supplier bills (ie the google advertising bills for a few months). They came up with this plan as a way of getting around charging VAT, but I'm sure that they'll still need to account for VAT on the transaction, I just can't find anything to substantiate this.

Hope someone can help.
Thanks
Jodie

a) don't see why not; any reason why this wouldn't be pre-trade expenditure.

b) the difference between a loan and a customer receipt is that a loan is paid back and a customer receipt is not. HMRC time of supply rules state that an invoice should be raised within 30 days of receiving the money. Consequently in the unlikely event of an investigation, if HMRC realized no invoice was raised within 30 days and the money was never repaid a penalty could be due (I would have thought the penalty would be in the 30%-70% range as the error is deliberate not careless).

c) the business is essentially receiving income "off the books"; again, in the unlikely event of an investigation, if HMRC realized the business is not accounting for income received a 30%-70% penalty could be due.

JodieR

Thanks for the replies, just to clairfy they're not trying to do anything dodgy here, just trying to find out the various implications of the options.

as far as (b) goes, it would be structured in a way that Mr A would loan the company some money, and then when he sets up his Ltd company my client would repay his personal loan and invoice the Ltd Co for the completed project, sorry if I didn't make that clear.

and (c) wouldn't really be receiving money 'off the books' - if Mr A paid the advertising bill the client was hoping that they could just not claim that cost in the accounts, which would increase their corporation tax bill. I think that it would probably fall under the 'barter' catagory and as barter arrangements do need to be declared on the VAT return it becomes a pointless exercise, do you think I've got that right?

Jodie

deanshepherd

JodieR wrote: »

..do you think I've got that right?

Yes.

JodieR

Thanks Dean!