VAT can be a complicated business

A lack of clear advice and excessive accounting bills on a regular basis led this four-partner dispensing practice to appoint AISMA accountant Foxley Kingham on the basis of a fixed fee.

Early on in the process of preparing the first annual accounts Foxley Kingham noted that the VAT records and results were significantly out of line compared to their other dispensing clients. On reviewing the calculations, Foxley Kingham’s specialist VAT manager advised that the complex partial exemption calculations, as required by dispensing practices, had been incorrectly performed, not just for the previous year but for the past four years since dispensers were forced to register for VAT. There were significant overclaims in each month’s calculations, no adjustments for breaching the “de minimus limits” and no annual recalculation. An initial estimate showed the errors could result in the repayment of VAT, interest and penalties of around £200,000.

Chris Howe, director at Foxley Kingham, says: “When we questioned the practice manager we discovered that the practice had obtained a spreadsheet template from another practice and had used that without reviewing its results, with disastrous consequences.” The practice had also been advised by their previous accountants that due to the complexities of VAT registration their annual accounting fees would need to be increased by £1,800. Consequently the practice assumed that the accountants would be thoroughly checking the VAT workings when they prepared the annual accounts. It was clear that no such checks had taken place in any of the previous four years.

Foxley Kingham advised:

* The VAT calculations needed to be re-worked, and HMRC advised in writing of the significant overclaim

* That VAT repayment over 12 to 18 months should be requested from HMRC, with drawings restricted accordingly

* The retired partner would need to be advised that a contribution representing his past profit shares of the overclaim    would be required

* The new partner should be informed that only a minor contribution would be required as she had only recently joined  the practice

* That tax returns would need to be revised downwards for the past two years and recoveries of income tax made

* That superannuation certificates would need revision as pensionable profits had been overstated by the excessive VAT  claims

* Ongoing monthly VAT workings should be reviewed by Foxley Kingham until the practice was confident in its abilities

* That Foxley Kingham would perform an annual VAT review on the preparation of each years’ accounts.