I’ve paid the assessment so why does my accountant say I have to pay *more* money to HMRC?

I was asked this question by a client recently who had had a visit from the VAT office to check their VAT accounts. In doing this the VAT inspector had noticed that my client had not been charging VAT on some sales they’d made. After investigating the reasons the VAT inspector decided that VAT should have been charged and calculated how much VAT my client had to pay.

How did the VAT inspector do this? Well, let’s suppose for the moment that my client had issued an invoice for £100. The VAT inspector would want to work out how much of that was VAT – he was treating the invoiced amount as VAT inclusive – by applying the VAT fraction to it. He would get the answer £13.04 (for 15% rate of VAT) and raise an assessment on that basis.

Client paid the assessment and issued invoices to its customers adding VAT to the invoice, i.e. asking the customers to pay £15. Because HMRC’s assessment was for £13.04 this meant that my client still owed them £1.96.

So what’s the worry, it’s less than £2.00? Well the worry is that the final figure for my client was in tens of thousands. I only used £100 as it’s easy to show the way things work with small round sums.

Do you see what’s happened? Do you understand why there’s extra VAT to pay?

You do? Okay skip the next bit and add your comment at the end of the article.

If you don’t, read on:

The VAT inspector treated the invoiced amount as VAT inclusive. My client treated it as VAT exclusive. My client collected an extra £15 per £100 from their customers so had to account for VAT out of that because they’d received extra ‘consideration’ for the goods they’d supplied.

Consideration just means payment – but allows for payment to be in any form, including part exchange or barter.

The accountant had explained this to my client already, but the client apparently preferred to hear it from me. Maybe it’s the way I tell ‘em?

Thank you for reading this far. Please leave a comment on this article.

I was asked this question by a client recently who had had a visit from the VAT office to check their VAT accounts. In doing this the VAT inspector had noticed that my client had not been charging VAT on some sales they’d made. After investigating the reasons the VAT inspector decided that VAT should have been charged and calculated how much VAT my client had to pay.

How did the VAT inspector do this? Well, let’s suppose for the moment that my client had issued an invoice for £100. The VAT inspector would want to work out how much of that was VAT – he was treating the invoiced amount as VAT inclusive – by applying the VAT fraction to it. He would get the answer £13.04 (for 15% rate of VAT) and raise an assessment on that basis.

Client paid the assessment and issued invoices to its customers adding VAT to the invoice, i.e. asking the customers to pay £15. Because HMRC’s assessment was for £13.04 this meant that my client still owed them £1.96.

So what’s the worry, it’s less than £2.00? Well the worry is that the final figure for my client was in tens of thousands. I only used £100 as it’s easy to show the way things work with small round sums.

Do you see what’s happened? Do you understand why there’s extra VAT to pay?

You do? Okay skip the next bit and add your comment at the end of the article.

If you don’t, read on:

The VAT inspector treated the invoiced amount as VAT inclusive. My client treated it as VAT exclusive. My client collected an extra £15 per £100 from their customers so had to account for VAT out of that because they’d received extra ‘consideration’ for the goods they’d supplied.

Consideration just means payment – but allows for payment to be in any form, including part exchange or barter.

The accountant had explained this to my client already, but the client apparently preferred to hear it from me. Maybe it’s the way I tell ‘em?

Thank you for reading this far. Please leave a comment on this article.