Was just wondering whether anyone would like to share their thoughts on the following scenario:


A company submitted accounts with profits chargeable to CT, but as the company were owed a VAT repayment larger than the CT, they asked the inspector of taxes to postpone the CT, Until the repayment was made.

The reply from the inspector was that HMRC were investigating the VAT return/ repayment, and therfore they were of the opinion that no repayment was due as yet, and thus could not postpone the CT.

The company wrote back to say that they would amend the accounts to show that there was no vat return due (in line with the opinion of hmrc), which would result in nil CT, as the INPUT VAT on the VAT return, would be treated as part of purachese in the accounts, increasing the cost of sales and therefore reducing profit. (The VAT element would then be adjusted as and when the investigation was completed)

HMRC SAID FINE send in amended accounts, now this is where it gets tricky.... if the accounts are amenmded to show no repayment of VAT due, beacuse the input VAT is treated as cost of sales, then the company would be making a loss, which is not too bad, but the fact that dividends have been issued, how would they be justified, as on this basis there are no profits to withdraw on.

The company cannot pay the CT as it stands, and finds it hard to undertsand why it is they simply cannot postpone the CT untill the VAT return query has been resolved.
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I can't believe HMRC actually said that....

First things first, why are they disallowing the input vat?
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they are not saying that they are disallowing the input VAT, but beacuse it is being verified they hold the opinion that at this moment in time, there is no Repaymnet available. They have already taken 12 months so far without concluding anything,
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12 months? Wow.
What industry are you in?
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You have been given some very bad advice. You cannot do as you suggest and adjust the accounts of the company as they would not show a true and fair view. This would remove the problem of the ultra vires dividends.

Do you have an agent dealing with the vat investigation for you? Have the Vat office come back to you at all with their findings or reasons why they are denying your repayment?
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zeno i understand what you are saying, but at this moment in time we are not entirely sure that HMRC will make the repayment, as they have quite clearly stated that the amount is at present not available.

So if the accouints are not amended and show that a repayment is due, whereas there is a possibility that HMRC may challenge or disregard the VAT claim (who knows i mean its taking them an age to sort out), wouldent those accounts be misleading to the reader of the statements?
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jenni its the care sector, but with several different types of activities within the sector.
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If the vat non-recoverable then that should indeed by added to the expenditure it relates to in the accounts however you have not established that this is the case.

Have HMRC really given you no reasons? They must have said something - Is it because of that they believe you are providing VAT exempt services?
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Opinions?

Wow, that is a really interesting case.

The starting-point must be: what is likely to happen? The underlying legal position is unclear, so the company directors must take a view as to what the likely outcome will be, to ensure that the accounts are as accurate as possible under the circumstances. Obviously if the case turns out to be the opposite of the director's view, an adjustment will be made later. A note to the Company Accounts will also be necessary regarding the material assumptions.

So. What will happen? It seems there is a real possibility of the VAT not being repaid, so yes I would account for it as a cost in the Company Accounts; which therefore will also be deductible from taxable profits, resulting (if I understand you correctly) in nil Corporation Tax liability.

What about the dividends? Well, they seem to have been illegally paid (though presumably the company distributed the dividends before the risk of non-repayment became apparent?). There are rules about this, which I did have to consider at one point, though in the event I did not have to exercise them. If nobody else here can help with the rules for illegally paid dividends, you might have to buy in some advice. An insolvency specialist might well know the answer. One route was to attempt to claw back the dividends already paid as far as possible. Of course, by the time this has been attempted, you might know the answer from HMRC.

We have seen HMRC behaving in a truly despicable manner in recent years, delaying decisions and creating uncertainty which damages and destroys businesses. There have been ?0 billion of VAT frauds in recent years, but really the delays in decisions and investigations are highly damaging.

Sorry I can't be of much help. Opinions are all I have on this one. Good luck.
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