I recently took on a construction works company registered under the CIS regime. They started their business in August 2013 and from my calculations they exceeded the VAT registration threshold of £81,000 in March 2014. Since then, they have had revenues of approximately £32,000. From the 30th of March until present they have only worked with two significant customers (limited companies).The taxman is saying that the two customers are not legally required to pay VAT on the invoices for this period since it was not agreed at the time of contract. How do I approach the two companies? What if they are registered in the VAT flat rate scheme (FRS)? If the companies do not pay VAT on the previous invoices, should I only record the VAT payable of 13.5% (labour only building or construction services for the first year) of revenues as a liability since there was not VAT received?

Arthur Weller replies:
A business has until the end of the month in which they discover they have exceeded the VAT threshold, plus a further 30 days, to register for VAT. So in your case, as from 1 May they should have charged VAT. If they didn't inform the customer that the amount billed would be subject to VAT, they can't expect the customer to pay. Usually registration for the FRS cannot be backdated to an earlier date. However in a case like this, of late registration for VAT, maybe it is worth writing to HMRC to ask them to apply the FRS from the date when the business should have been registered (i.e. 1 May), so that the business will not have to pay the full 20% VAT to HMRC, which they didn't actually receive from the customer. It is worth noting that if the business can satisfy HMRC that taxable supplies in the next twelve months will not exceed the VAT registration threshold (currently £81,000), there is a possibility that registration is not necessary.