Confused - claiming back reclaimed VAT?

[spencerwood]

A friend and I incorporated a limited company earlier in the year and recently submitted our first 3 monthly vat return on July 31st. As we are still at the company setup stage and have not yet started making any sales, HMRC owed us money for our purchases and this amount has since been paid into our business account.

The purchases were made from our personal bank accounts since our business account only contained £2 from both of our single £1 startup shares. My business partner has purchased more items than I have and so should receive back a greater proportion of the reclaimed vat.

I am not sure though what is normal practice and at the moment as we are unsure of what to do with the reclaimed vat, we have just left it in the business account. Can we just draw out the two amounts from the business account into our personal accounts and note in the cashbook the payment in from HMRC and two payments out?

A bit more background - a couple of the purchases my business partner has made was for some computer equipment. The nature of the business heavily involves the use of computers but he probably would have bought the items anyway had we not started a business. He paid for the items using his personal account and is therefore due the lions share of the reclaimed vat. We accept the possibility that the equipment is now company property and should be logged as a fixed asset and depreciate over time. However, this puts us in the situation where my partner has technically put more money into the business than I have and perhaps more shares should be issued to him accordingly; although we would very much like to keep things 50/50. I on the other hand am making do with my own existing personal computing equipment which I bought 4 years ago so cannot claim retrospectively and in any case, no longer have the receipts. I don't have the money available to buy myself much needed new kit which would financially even things up a bit between the two of us.

Perhaps we need to wait until there are sufficient funds in the business account so that we can each fill out an expenses form for our purchases and then claim back the entire amount including the vat. We would still be in the situation whereby my partner would be claiming a lot more back then I would be and I would essentially see very little of the initial sales. Is there anyway we can balance things up? We were ultimately going to pay ourselves via dividends rather than salary but as dividends are linked to shares, and we each have 1 share each, then this isn't likely to be possible.

If anyone can help me out with some suggestions that would be fantastic? Perhaps there is some online reading material of what best to do that you could point me to.

Regards

Spencer

[boxby]

This isn't a case of claiming back reclaimed VAT, it's a directors loan account issue. Effectively you've loaned the company the GROSS value of the expenses, and it's this that needs to be recorded as a directors loan, and eventually it's this that needs to be repaid.

The reclaimed VAT doesn't really "belong" to you as directors.

Given the suggested cashflow, i'd suggest leaving the VAT refund in the business bank account, use this to generate some revenues, and then when the business cashflow is looking a bit more substantial and stable, look to get the whole amounts repaid to you.

The repayments to you are simply that, directors account loan repayments, nothing to do with dividends, salaries, PAYE, Corp Tax, or VAT. Repaying these expenses has absolutely nothing to do with shareholdings.

Hope this helps
Sandra

[consultant]

you need to move the expenses from personal to the business somehow e.g. register a claim on the books.

When you have done this, assuming you are VAT registered, you fill out a VAT return, when due.

[spencerwood]

Thanks very much for your suggestions. Here is a possible workflow - if you are able to confirm if it is acceptable that would be very much appreciated:

Currently we have recorded in our purchase ledger each purchase and from which account it was purchased from which could be either one of the two directors personal accounts or the business account.

At some point in the future when funds are available, we can execute a function on our database to total up the expenditure for each director and write a cheque to ourselves for the gross amount. Each entry in the Purchase ledger could then be marked as paid. All future purchases could then be made through the business account, or if we do make more purchases through out personal accounts then the database function can be run again, ignoring all entries that are already marked as being paid of course. The reclaimed vat from HMRC would just remain in the business account.

Apart from making out the two cheques, recording the cheques in the cashbook with comments along the lines of "Repaying Director Loan" and marking the purchases as paid in the purchase ledger, is there anything else "official" that needs to be done. You mentioned this being handled as a directors loan - is following the above processes a valid thing to do or are there special forms and declarations that need to be taken care of.

Best Regards


Spencer

[DavidT]

Hi Spencer

It wouldn't ideally be shown in the Purchase Ledger but in the DLA (Directors Loan Accounts -also liabilities but seen differently, ratios & KPIs affected etc).

What software are you using?

Essentially, the debit will go against the asset or expense account (as would be the case if paid by the Ltd) and the credit against a DLA (or if a single one used, identifying the individual).

The result should be the Assets and Expenses show all business transactions, and the DLA(s) will show how much of this was paid by the directors.

This should be treated as a completed separate issue to the share split, which shows ownership of the company. The DLA simply shows what the company owes the directors.

So after that, you should be able to clearly see what each director is owed by the company and can then be drawn/repaid without need for tax, dividends etc.

One possibly fair way for you to both withdraw from the DLAs fairly is to take the available cash (considering what the company needs to keep) in the same proportion as to what the company owes each of you.

So if you are owed £2K, your colleague owed £3K and the company has £1K cash available to take out - a fair suggestion might be for you to take 2/5ths (£400) and the other director to take 3/5ths (£600).

Of course you can consider each of your own needs and what suits you... no fighting!

Does that all make sense?

[spencerwood]

Hi David,
Thanks for your input. We are using our own software. We looked at Microsoft Accounting initially but it all seemed complex handling this expenses issue so we decided it would be far simpler to handle it ourselves. Since we are both software developers it wasn’t a problem. It also meant that our accounting could be integrated automatically into our product and really cut down on manual day to day accounting. As we’ve written everything ourselves, this also means we can easily separate out our expenses entries from the purchase ledger into a new Director Loan Account which I can do very easily.

I’m just concerned about there being any special protocols we need to follow when we actually come to refunding ourselves in terms of tax, forms, and declarations or whether it is just a simple as writing ourselves cheques and marking the entries in the DLA as being cleared.

Thanks again

[DavidT]

There isn't any real protocol for it I would say... pretty much so long as legitimate business transactions are accurately recorded, accounts reconciled - you wouldn't have any issues unless you started drawing past what you are due to be repaid from the DLA.

After that - either it is a loan to you (s419 tax would apply, as well as limits) or simply a salary or dividends - both of which you may take before the DLA is repaid.

To summarise - the DLA is your own money so no further tax considerations are need, just keep accurate records!

[spencerwood]

Thats fantastic - thanks for your assistance

Spencer