Income Tax and VAT reclaim

[Alan Fish]

Hello everybody.
First post so apologies if in wrong forum.
I run a small part-time one-man business selling zero VAT rated goods and each quarter submit a VAT reclaim form for business expenses. Like one of your other recent contributors I too have recently had a routine VAT visit and all was in order and following this I received a large sum (large for me) by way of reclaimed VAT. During the VAT visit I specifically asked the VAT man about whether this refund of VAT was taxable (in the presence of family witnesses) and he was quite positive it was not. I later rang the VAT office and they confirmed this. However when I looked through some old accounts from when an accountant was looking after my business I see he has recorded these VAT refunds as income on which I have been taxed and had to pay Class 4 N.I.

Who is correct please?

Many thanks.

 

[QuickHomeBuyers]

VAT reclaim on your business expenses is not an income.

I am not 100% sure on this though. Likewise VAT isnt included in your profit loss figures.

For a VAT registered business, VAT on business related services is not an expense and VAT reclaim is not an income.

 

[MASSEY]

Batra is correct, and so was the vat man, and so were the people on the vat line,

Me thinks you is a worry to much?

 

[Williams lester]

Hello everybody.
First post so apologies if in wrong forum.
I run a small part-time one-man business selling zero VAT rated goods and each quarter submit a VAT reclaim form for business expenses. Like one of your other recent contributors I too have recently had a routine VAT visit and all was in order and following this I received a large sum (large for me) by way of reclaimed VAT. During the VAT visit I specifically asked the VAT man about whether this refund of VAT was taxable (in the presence of family witnesses) and he was quite positive it was not. I later rang the VAT office and they confirmed this. However when I looked through some old accounts from when an accountant was looking after my business I see he has recorded these VAT refunds as income on which I have been taxed and had to pay Class 4 N.I.

Who is correct please?

Many thanks.

The correct answer is.....it depends! If the accounts were drawn up using VAT inclusive figures, then the repayment of VAT would be entered onto the self assessment form to be added back as income.

If on the other hand the accounts were drawn up using the VAT exclusive figures then the VAT refunds should not be shown on the self assessment as they would have already been dealt with in the accounts and would be represented by a balance sheet figure.

Have a look at the notes here (page SEFN 5) http://www.hmrc.gov.uk/worksheets/sa103f-notes.pdf

 

[Alan Fish]

Dave Poole (Williams -Lester) Post 4 - Thank you very much for your full and informative reply. It appears Massey (post 3) was wrong in that I should indeed have worried and I did not worry too much!

The matter has now been clarified thanks totally to Dave Poole. For more than 15 years my professional accountant from a large well-known firm has submitted my accounts to HMRC on the basis that all income was from the sale of zero rated goods and all expenses were including VAT. In those accounts he added on as income the reclaim of VAT from each of the four quarters annually, hence I paid income tax and class 4 N.I. on the profits which included the VAT reclaimed.

Following Dave Poole's explanation and accompanying link I have since spoken to the VAT office and they confirm that in these circumstances the VAT reclaimed is indeed income on which tax and NI needs to paid. They confirm that my accountant was correct and the VAT man and VAT office were wrong as they assumed without checking that the accounts had been prepared 'VAT exclusive'. The penalties that I could have incurred had I got it wrong were not insignificant.

Once again Dave Poole I thank you.

Kind regards
Alan