I would like to ask you for help since there is something that I don't get when we talk about irrecoverable debts. Let's say I run the business and sold my products to a customer on credit. My sales are vatted. Some time later I found out that i will never be paid sales invoice cause the customer went bankrupt . It is said that I should reclaim vat in case irrecoverable debts occur. Since I will never be paid output vat from sales invoice there is no vat liability for HMRC. How is it possible that I can reclaim vat from HMRC if I haven't paid any vat to HMRC in the first place ?
-- Edited by rafapak on Friday 18th of November 2016 11:08:56 PM
-- Edited by rafapak on Friday 18th of November 2016 11:56:00 PM
It depends on how you operate your VAT - it's only a case that you won't have paid the output VAT in the first place if you are running on a cash basis, whereby the VAT becomes due in the period the money is received. In this situation, therefore, you are correct - no VAT paid, so no VAT to reclaim.
However, if you aren't on a cash basis, which you might do because your turnover is above the threshold (or you might do it because it's simply more practical for the business in question) the VAT is due in the period in which the sale is made. (To provide the goods on credit, you will have raised an invoice for £x plus VAT with the payment terms on it.)
Therefore, you've made a sale/raised an invoice for (let's say) £5,000 + VAT, total £6,000. At the end of the VAT period, that VAT will show in the outputs of your VAT return - you effectively pay it over to HMRC, regardless of whether or not payment for the invoice has been received. So in this instance, that VAT will be recoverable if the debt becomes non-recoverable.
(Also note that there are rules about how and when the VAT can be reclaimed - but they should probably be left until you are at a later stage of your studies.)
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Vince M Hudd - Soft Rock Software
(I only came here looking for fellow apiarists...)
Can you tell me which accounting standard stipulates when obligation to recognize vat arises ? Let's say you have delivery in march, invoice in april and payment in may. I know there are laws that stipulate in which of these three months obligation to recognize vat arises.
-- Edited by rafapak on Saturday 19th of November 2016 12:10:25 AM
Not sure what you mean by accounting standard in this case - it's not an accounting standard, as such, but the rules laid down from on high. The basic answer is here: www.gov.uk/vat-record-keeping/time-of-supply-or-tax-point - i.e. you're talking about the 'tax point' (unless I'm completely misunderstanding the question).
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Vince M Hudd - Soft Rock Software
(I only came here looking for fellow apiarists...)
Under the VAT regulation you have a specified time frame as to when you send invoices and when a tax point can occur, with or without an invoice. This will be covered in more detail in the ITAX unit (or sorry, whatever the name for the VAT course is now under AQA2016) at level 3.
I would certainly encourage some reading of the link that Vince said and the wider rules around issuing invoices, tax points and time/place of supply BUT you may get far too embroiled before you are ready. Dont forget that the AAT does this in manageable chunks and walks you through the process for a reason, so whilst its great you ask, be careful not to run before you can walk.
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
