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TonyTax
TonyTax, Tax Consultant
Category: Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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My son took over a hotel, bar and restaurant in December 2012

Customer Question

My son took over a hotel, bar and restaurant in December 2012 and pays rent to the owner of the building. He has put in £250,000 of his own money into the refurbishment.
He made a VAT return at the end of February 2013 while the refurbishment was still going on and before the hotel opened. He was able to claim around £15000
back in VAT which was largely down to paying tradesmen doing the refurb.
The hotel officially opened in March 2013 and business has been fairly good but unpredictable. The business being, food, drinks and hotel rooms.
He is due to submit another VAT return very shortly and is a little unsure of how much he will have to pay.He has about £12000 to claim back.
His accounts show that he has turned over £280,000 since March and he is terrified that he will have a vat bill of £56000 (20%) of turnover.
Whilst business has been steady, he has not made any profit at all, just holding his own really and barely taking out any salary for himself.
Can it really be the case that he has to pay 20% of his turnover to the vat dept, even though it will probably put him out of business?
Submitted: 3 years ago.
Category: Tax
Expert:  TonyTax replied 3 years ago.
Hi.

If your son started the business in March, has he not completed and submitted any VAT returns since then? Is the £12,000 the VAT your son has paid on purchases since March?
Customer: replied 3 years ago.

Hi


 


This is the first vat return he has to make since he officially opened the business in March. As I mentioned, he was able to claim around £15000 back at the end of February after paying a number of tradesmen but he wasn't actually trading until March this year.


 


I have calculated that he has around £12000 to claim back since March, although I think some of his invoices since March have gone astray so that might be a larger sum when I eventually track them down.I'm not sure if its relevant but he pays rent of £2500 per month on the premises.

Expert:  TonyTax replied 3 years ago.
Thanks.

Leave this with me while I draft my answer.
Customer: replied 3 years ago.

ok, thank you.


 


Also we are so unsure of the vat on food. He doesn't pay it on purchase so does he have to charge it on sales?

Expert:  TonyTax replied 3 years ago.

Hi again.

The first thing I would advise your son to do is to appoint an accountant. Businesses have so many compliance obligations these days and its easy to put off the work involved when you are busy running the business itself and before long you find yourself up against a deadline. Whilst an accountant will charge fees, he or she will keep a client up to date and take all the boring compliance work out of the business owner's hands. A good accountant is worth alot to a business.

VAT returns are due quarterly for most businesses so its a little odd that you are about to submit the first one given that the business has been running for about 9 months. In most cases the returns have to be submitted online as opposed to on paper. There is some useful information on deadlines and online filing here.

A business is just an unpaid tax collector for HMRC. I always advise clients that the VAT they charge is not their money and that, if at all possible they should hold it in a separate account from the business income. I realise that this can be difficult especially when a business is barely breaking even but if at least some can be put away, it may help to alleviate payment problems later on.

It seems to me that because no VAT returns have been done since the business started there will be a sizeable liability which based on what you had tole me will be £44,000 (£56,000 less £12,000). Clearly, that is going to be a problem and I'd advise you to have your son contact the HMRC Business Payment Support Service as soon as the VAT liability is quantified and the VAT return has been submitted. Hopefully, he will be able to negotiate a payment plan with the tax office. You should read the notes here which deal with payment problems.

You should take a look at VAT Notice 709/3 (June 2013) here which is aimed at those who run hotels and holiday accommodation businesses. Food supplied and intended to be consumed on the premises is subject to VAT. See sections 1 and 3 of VAT Notice 709/1 (October 2013) here. However, this is a complex area and I'd advise you as I did earlier to appoint an accountant to put you on the right path in this regard.

 

If the landlord charges VAT on the rent, then this can be reclaimed in the VAT return.


I hope this helps but let me know if you have any further questions.

Customer: replied 3 years ago.

Hi


 


Many thanks for your response. Although very comprehensive, I was really hoping that we were wrong about him owing £56k less any vat he has to claim back.


A payment plan is one way round it but whilst paying that back he also has to set aside vat for further returns so I can't honestly see the business being viable.


It does seem so iniquitous that he has put all of his own money into it, barely taken an income and is in such a bad position already.


He has said that if he does have a large amount to pay, he simply can't carry on trading.


If he ceases trading or closes the business down, what will be his position regarding any vat he owes? It is a limited company.

Expert:  TonyTax replied 3 years ago.
I can't say exactly what the business owes in VAT but the basic calculation is that you deduct the VAT you have paid for your supplies from the VAT you have charged buyers of your goods and services and if the result is a positive figure you pay it over to HMRC and if the result is a negative figure you receive a refund of VAT.

If the business cannot pay the VAT and it stops trading, in most cases, the VAT owing will be lost to HMRC and they will have to write it off. Many businesses have gone under in recent years and that has cost the Treasury billions. In cases where the business owner has run it negligently or taken too much out to live on, the tax office can and do pursue the owner for payment of tax debts as would a liquidator if one was appointed.

Limited liability protects most business owners from such action where the business has failed due to circumstances other than a reckless or negligent business owner. That doesn't sound like your son to me.
Customer: replied 3 years ago.

Yes, thank you for that. He certainly hasn't been reckless or negligent, quite the reverse but obviously naive about vat issues.


 


It seems almost unbelievable to me that someone can spend £250k (earned from a previous business) on a hotel, refurbishing it to a high standard, creating jobs in the area whilst barely taking an income for himself and this is where he is after only 8 months.


 


Thank you anyway for your help.

Expert:  TonyTax replied 3 years ago.

Thanks. I'm only sorry I cannot tell you something else.

Expert:  TonyTax replied 3 years ago.
Hi again.

I'm wondering if there is anything else that you need clarification on since you have yet to rate my answer to your question. If not, would you kindly rate my answer so that I get paid for my work. Thanks.

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