How to report Amazon withheld VAT (£15,000) in Micro Accounts (01-08-2023 to 31-07-2024)?

[friddgoo]

Hello,


Between January and August 2024, Amazon withheld £15,000 from our company’s sales proceeds to remit historic VAT liabilities from 2021 to 2023.


Important context:

• Under UK VAT e-commerce rules, we are not established in the UK for VAT purposes.
• Amazon was the deemed supplier for these sales and therefore responsible for collecting and remitting VAT.
• However, they withheld the £15,000 from our net proceeds during the 01-01-2024 to 31-07-2024 period to settle these historic liabilities.

Now for the accounting treatment for Micro Accounts (year end 31-07-2024):
Some accountants suggest:

• Report full gross sales, then show the £15,000 as a bad debt or adjustment.

Others suggest:

• Reduce net sales directly by £15,000 (i.e., report total received minus withheld amount).

My question is:
Which method is correct for Micro Accounts to stay compliant with HMRC?

 

[numbersrule]

It sounds like Amazon didn't collect the VAT in 2021 to 2023, which means in those years there would have been VAT Liabilities at end of year, albeit did you know that at the time?
I.e. did your earlier filed Accounts reflect the VAT Liability? If not, were your Profits therefore over stated in those years? And what do your Accountants say about the need or otherwise to correct the earlier years accounts?

Regarding the first option you mention of reporting Gross Sales along with a bad debt, in my humble opinion that is nonsense. This is not a bad debt.

The second option makes more sense because presumably Amazon were collecting the VAT correctly by Jan to Jul 2024 in addition to withholding the historical VAT liability, thereby leaving you with the Net amount minus the historical VAT Liability.

In my humble opinion you should correct the earlier years accounts to show the VAT Liability, then the Accounts for 2023-2024 can have an opening balance VAT Liability, which is paid off when Amazon take their 15k off your Net Sales in that year.

Hence report your Net Sales in Full and your Cash in the Bank will be 15k less than it would otherwise be because the opening balance VAT Liability has been paid off.

In some circumstances, Accountants may advise against correcting earlier years filings. In this scenario you would have to report the historical 15k VAT Liability as an expense (because you would have no VAT liability in your accounts to pay off) so that it reduces your profits for the 2023-2024 year but in my opinion that would be more unsatisfactory than the potential pitfalls of correcting the earlier years accounts.

Treating the VAT Liability as an expense is nothing to do with a bad debt. A bad debt remember is money owed by Debtors. You have paid £15k to HMRC via Amazon by virtue of receiving less income. Making less profit in 2023-2024:as a result of this expense compensates for reporting more profit than you should have ( I'm guessing ) in 2021 to 2023.

The historical VAT Liability error has distorted your Corporation Tax position.

Get it corrected.

( although you are likely to receive a whole host of alternative views! )

 

[Daybooks]

The correct method is to follow Financial Reporting Standards 105 (FRS105) which is the standard for micro entity accounts.

Section 8 deals with errors. S8.14 (b) is probably most relevant to consider in relation to what you have described. S8.16 should be applied if considered material.

https://media.frc.org.uk/documents/FRS_105_September_2024_V7owJHN.pdf

 

[Daybooks]

Adding to above:
You can if you wish file amended accounts for the previous period.

 

[friddgoo]

my accountant suggest : Reduce Net Turnover (Preferred for Simplicity)

• You reduce your total turnover by £15,000.
• You report only the amount you actually received from Amazon as your turnover.
• You must clearly explain in the notes that £15,000 was deducted from gross sales to cover historic VAT remitted by Amazon.
• This is acceptable because FRS 105 paragraph 24.11 states that:
  

  Turnover shall exclude VAT and other similar sales taxes

 

[Daybooks]

my accountant suggest : Reduce Net Turnover (Preferred for Simplicity)

• You reduce your total turnover by £15,000.
• You report only the amount you actually received from Amazon as your turnover.
• You must clearly explain in the notes that £15,000 was deducted from gross sales to cover historic VAT remitted by Amazon.
• This is acceptable because FRS 105 paragraph 24.11 states that:

I wouldn’t think any one would object to that treatment.

Generally income should be shown gross (I.e. without the deduction of fees) and accounts prepared on an accruals basis.
The treatment is acceptable but not specifically because of S24.11. As I understand your company is not VAT registered therefore you have no VAT to be excluding. Your overpayment from Amazon was their equivalent VAT as the deemed seller.

 

[numbersrule]

It seems to me that artificially reducing the Net Sales by £15k is likely to make a material difference.

Does £15k off Net Sales make a loss? I suspect it might if not VAT Registered?

So the proposed treatment might be simple but it is a 'two wrongs make a right' type of approach.

There may be a problem if you try to carry forward the loss from 2023-2024, because it has effectively already been used to correct the overstated profits in 2021-2023.

 

[Daybooks]

It seems to me that artificially reducing the Net Sales by £15k is likely to make a material difference.

Does £15k off Net Sales make a loss? I suspect it might if not VAT Registered?

So the proposed treatment might be simple but it is a 'two wrongs make a right' type of approach.

There may be a problem if you try to carry forward the loss from 2023-2024, because it has effectively already been used to correct the overstated profits in 2021-2023.

They are not VAT registered because they are not established in the UK for VAT purposes (as stared by OP).
Two wrongs might not make a right but but is perfectly acceptable for errors which are immaterial and he cost and effort of perfectly correcting is not warranted. Whether £15k is material for a micro entity is perhaps questionable but something for them to consider in line with FRS105. Leave them be.

 

[numbersrule]

They are not VAT registered because they are not established in the UK for VAT purposes (as stared by OP).

Mmmm

 

[friddgoo]

Hi,


We currently show a loss of £3,500, but without this adjustment, we would have a profit of approximately £11,500. We began Amazon FBA operations on 01/08/2020.


If Amazon, as the party responsible for VAT, reported the full gross sales to HMRC, this could create a discrepancy of around £15,000.


Would it be acceptable to include an explanatory note in our accounts to clarify this difference?

 

[Daybooks]

Mmmm

Aside from "stared' should be "stated'; not sure I follow...

 

[numbersrule]

Aside from "stared' should be "stated'; not sure I follow...

Yes, sorry, I was mmmming because even though they are not VAT Registered for the reason stated I just had my suspicions that £15k may be more than their original profits anyway and that seems to have turned out to be the case. This is why there is uncertainty about the best way forward.

To fully understand this we need to know what the profit was in each of the FYs in the 2021 to 2023 period and how much of the £15k was associated with each of those years.