Effect of using P/L from VAT registration year for company valuation forecasting

[grumpyfox]

I'm currently performing a company valuation and as a part of this the valuator asked for forecasts for the next 2 years. Our accountant performed forecasts using P/L, but this was using P/L during a VAT registration year. There are two things that I believe are "hidden" in a P/L that should be considered as a part of this:

1. Once we reached the VAT registration threshold our sales price became VAT inclusive. This was an effective price reduction, which should be incorporated into any forecast. This would be an effective £17 000 (£85 000 * 0.2) reduction in profits in future years.
2. Significant VAT was reclaimed as a part of the first VAT return. This impacts on P/L but would not have an impact in future years and so should be excluded from forecasting.

Both of these "peculiarities" add up to half of the yearly profits for the year used for forecasting, which I believe to be very significant (as the accountant just used a multiple of revenues/costs to forecast future profit). Is there anything that I am missing?

 

[StevensOnln1]

Profit and loss should show sales and purchases/expenses etc excluding VAT. By registering for VAT your company becomes an unpaid tax collector, collecting VAT on its sales, deducting VAT incurred on purchases and paying the difference to HMRC. VAT only features on balance sheets and cashflow forecasts, not profit and loss.

 

[grumpyfox]

I do understand this, but the mere fact of registering for VAT during that year means that the profit is much higher than it would have been if the company was already VAT registered and there were the same sales (due to part of the sales not having VAT inclusive and due to the VAT reclaim of preregistration purchases).

Therefore my assumption is that using P/L in a VAT registration year for forecasting doesn’t make sense?

 

[Scalloway]

This would be an effective £17 000 (£85 000 * 0.2) reduction in profits in future years.

If your annual sales are £85,000 including VAT the VAT element will be £14,167. The VAT will be 1/6 of the turnover.

How much of your purchases have VAT on them? Reclaiming the VAT will increase profit.

I agree using getting the correct VAT position will affect the forecast. Have you asked your accountant to amend it?

 

[Daybooks]

1. If your sales price was a price reduction as a result of VAT registration then that would have been a conscious decision not to increase by the VAT rate.

2. Unless you are using a flat rate VAT scheme the recoverability of the input VAT would not effect the profit and loss account because when VAT registered only the net values should be charged to profit and loss.

Whilst you may have higher unit costs pre VAT registration compared to post your forecasts should be “fit for purpose.” By this I mean it should address a like for like comparison (e.g. show all costs as VAT exclusive) and take into account any threats and opportunities. If you didn’t increase the price following VAT registration was this a missed opportunity or are you in a competitive market where price is sensitive?

A potential buyer will make an informed decision and so too should the seller.

 

[Paul Kelly ICHYB]

This was an effective price reduction

Why?