Hello everyone - could someone issue me with a sanity check please, because I think I've lost all trace of mine.
I've just had a strange conversation with someone at HMRC (nothing new there), during which he got very uppity with me about the topic of not putting items of expenditure on the relevant VAT return. What he was objecting to was the possibility of some expenditure being missed off one VAT return, and going onto the next, and in fact he said that penalties could be issued under such circumstances.
I was quite taken aback by this - is there a legal requirement for expenditure to appear on any VAT return at all? Should I not be submitting a VAT return where I know or even suspect that any expenditure is missing? Income I can understand, and I have never submitted a return where I had the vaguest inkling that any income was missing. But expenditure?
Strange as the question seems at first reading I can see what you mean in that only you could be losing, not HMRC so why would they fine you for an ommission.
The person from HMRC is however correct in that to move expenditure into a different quarter is a form of earnings management / window dressing / profit smoothing.
Income and expenditure must be shown in the period to which it relates, not in the period where the client would like it to relate in order to adjust their profits.
From a legal perspective, in addition to being a requirement of the finance act whch is renewed annually, The companies act gives power to the financial reporting standards to be regarded as though statute. And, as I'm sure that you must have seen in them, all the way through the line comes up again and again and again that income and expenditure must be recognised in the period to which it relates, not necessarily when it is received or paid.
As I say, I can see your reasoning but the persona from HMRC is correct.
kind regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Thanks Shaun - I guess I've been coming at it from the wrong perspective. So does that mean that where a client doesn't get every bit of paperwork to me in time for the VAT return, I should be refusing to include it in a later return? Or where I know there's paperwork outstanding, should I not submit the return? I know ideally everything should be matched, but it's quite a frequent occurrence that a VAT return has some items on it that relate to an earlier period, and I wasn't aware that there could be penalties for that.
As a second issue, is there now a possibility that this client will get investigated? I can only take some reassurance that the penalties even for deliberate omissions are a percentage of the underpaid tax, which is zero.
We can only work with the paperwork that we have. There are occassions that an odd item may slip accidentally into the wrong quarter through no fault of ours but we always do everything to ensure the things are recorded correctly.
If I knew that a client should have included entries in one quarter and I did not have all of the documentation I would give them serious grief especially as they have a month from the end of the quarter before the return needs filing.
There is always a risk of clients being investigated but a simple error does not automatically win an investigation.
The issue that you have had may be a good prompt for the client to supply you with all invoices and receipts for a quarter as soon as the quarter ends.
Penalties are not based only on percentage of underpaid tax only although that is what most of the HMRC pages refer to.
There is a second sort of VAT penalty where one does not adhere to the regulations where one can be charged £5 per day for the first breach until it is remedied. £10 per day for the second breach. £15 per day for each breach after that.
The maximum that you can be charged is 100 times the daily rate so the hypathetical maximum would be £1500.
The minimum penalty charge where the percentage of underpayment method is not adopted is £50.
I have never heard of that sort of penalty being applied but they do have it in their arsenal if they wanted to use it.
I think that whilst risk of penalty exists, unless you really peeved off the guy from HMRC the risk of such being applied is remote.
If this wasn't the result of an investigation I don't understand how this issue was discovered?
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Thanks again Shaun, much food for thought. What happened was that the client needs time to pay, and for that, HMRC needed to know the VAT due to the penny. I said I didn't have it to the absolute penny, because I was awaiting a couple of bits of paperwork from the client, which would have amounted to maybe £10 more VAT to be deducted. Due to holidays and other client work, I'm running very short of time to arrange the time to pay, and I'd been on the phone over an hour, so I was thinking of everything I could to get it sorted there and then. I asked if I could go with the figure I had, given that if it changed at all, it would only go down. Clearly a bit rash, on reflection, but the client is desperate, and I really wanted to help him.
I don't think I peeved the chap off, he was quite stern with me but not cross.
I now feel that I'm being a total pushover with many of my clients. They tend to just hand over paperwork when they feel like it, and although I always give them a list of stuff that's missing, they often don't deal with it. Then they roll up some weeks/months later with things they've found down the back of the sofa, and I end up dealing with it all in arrears.
Sorry to be a moaning minnie! This has properly dented my confidence, and I would be horrified if I'd caused problems for my client. Thanks for your sound advice.
From previous dealings I have had with hmrc I have found if the first person is unhelpful hang up and call again -I have a client who has real problems with paying vat and as had several payment plans, I spoke to the hmrc on Tuesday and couldn't have asked for a nicer woman -she was so helpful-there are some (admittedly not many) out there so keep trying
