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FLAT RATE SCHEME and ACCOUNTS

Hi, In VAT Flat Rate Scheme, invoice was £10,000 + VAT (20%) = £12,000 received by the business. Applicable FRS VAT Rate is 14% for the business, therefore business has paid £1,680 to HMRC. This is the only transaction during the year and business is preparing its accounts now. Is business taxable income £10,000 or £10,320?

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By BKD
19th Mar 2012 16:28

Oh no - not again

I suggest that you carry out a search on this forum. This topic comes up frequently, with passionately held differences of opinion. My own opinion is that turnover is £10k. Because, that is what it would have been in the absence of the FRS - why should one particular VAT scheme affect the level of reportable turnover? (But only if expenses are also shown net of VAT, with the FRS adjustment shown as a separate line).

One counter to that treatment, which I agree makes sense, is that if the business were not registered at all (and business is able to charge the 'VAT' in full) then turnover would be £12k. But if the basis of charge is £x plus VAT - so that the sales figure would be £10k if not VAT - that may change things.

As far as I am concerned, it boils down to personal preference - but I do take issue with anyone that says that one method is more correct than any other.

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By SteveOH
19th Mar 2012 16:39

As BKD said,

It's down to personal preference. I look at it from the viewpoint that the £12,000 has been invoiced (and is therefore gross turnover) and £1,680 has been paid over as Vat; leaving net turnover of £10,320.

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19th Mar 2012 16:58

Business taxable income is £10,320

The difference is whether with BKD you show that as 

Sales £10,000

FRS Adj £320

Total £10,320

 

Or with Steve OH (and me) you just show:

Sales £10,320

 

For the record I put the FRS as a -ve Sales type so detailed accounts show Gross less FRVAT but return just shows sales net of FRVAT

 

If you are preparing accounts with notes (as you should) ensure they say what has actually happened!

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or then again

I show the gross £12,000 as income with the vat paid as an expense, but that is purely because I find my clients understand it better that way

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So...

...three valid options, all work, all arrive at the same net result.

You just need to decide which you prefer.

I go for option 2 along with Chris S and SteveOH.

 

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20th Mar 2012 08:54

... and I go along with Marion!

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20th Mar 2012 09:46

I'm going with my trusty (dusty) ATT book

"HMRC confirms that for businesses using the FRS, it is expected that accounts will be prepared using gross receipts less the flat rate VAT percentage for turnover and that expenses will include the irrecoverable input VAT."

So I show gross turnover as x, the next line of FRS payment y, with a third line marked net turnover z.

But this is all academic, provided you show the correct net profit and pay the correct VAT, HMRC won't give a fig.  By definiton, these businesses can't be multinationals, they are all relatively small.

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22nd Mar 2012 10:27
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22nd Mar 2012 10:43

Interesting. With a Partnership we used to act for under the FRS, the Partnership tax Return was queried and had to be amended to show the Gross sales as turnover with the FR VAT shown as a charge in the expenses! This was at the insistence of the Revenue!

Admittedly a couple of years ago now, but still!

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By chas01
22nd Mar 2012 11:59

FLAT RATE

Our understanding is that the approach with a limited comapny is the opposite of that with a sole trader.  Aah SImplification!

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22nd Mar 2012 12:28

Limited companies are covered by the Companies Act which has a "no netting off" rule!

Partnerships, as far as I am aware, do not?

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22nd Mar 2012 13:32

Personal preference

Its not personal preference - you do what it says at Martin Jacksons Link

 

Marion Hayes approach of showing Gross income and VAT as an expense is wrong and if I was the examiner she just failed her exams... :(  ...or I would qualify your accounts as Senior Statutory Auditor

 

You have over inflated turnover and expenses by doing it  that way

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By khalm0
22nd Mar 2012 14:09

Guys,

I have a query on the calculation behind the 14%. I went to a HMRC run VAT course recently and she advised me differently on how to calculate the flat rate. In this case, VAT at 20% on the 10,000 is £2000, so 14/20 of £2000 is £1400. This is how the tutor advised me to calculate for the flat rates. Clearly, the way you guys have calculated above, you have taken a straight 14% of the gross (12,000 * 0.14) to give £1680.

I am a little confused and worried as I have processed some clients using the way the tutor had advised me to....

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22nd Mar 2012 14:29

The flat rate % is applied to gross turnover.  Do you have HMRC handouts?

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22nd Mar 2012 14:34

Fred is right

 What fred said is correct. Dont do it as a % of the NET...or get a big vat bill and a fine

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By khalm0
22nd Mar 2012 16:36

This is where the VAT tutor didnt explain properly, she clearly didnt understand it properly. Looks like I will have to resubmit some VAT returns and have some angry clients. And no, I dont have any handouts as she never had anym they had ran out! Thanks for clarifying..

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Tom - I follow extract from return guidance from HMRC

Value Added Tax (VAT)

If you are registered for VAT you may enter details of your business income

and expenses either:

• excluding VAT (that is, with the VAT taken off), or

• including VAT.

If you choose to include the VAT either:

• enter your net VAT payment to us as an expense in box 29, or

• enter any net repayment you received from us in box 15. 

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By BKD
22nd Mar 2012 20:45

Sorry, Tom, but ...

.. your post above ("personal preference") is contradictory. BIM31585 recognises that at least two treatments are possible - one of which is to show turnover gross with the FRS payment as a separate expense (Marion's treatment). In any event, that paragraph simply explains to Inspectors what they may see in terms of FRS VAT accounting - it is not a prescriptive instruction to taxpayers on how it should be done.

Having said that, one of the reasons I prefer the net approach is for the very point you mention - if a VAT-registered business includes VAT in turnover it could lead to distortion. Then again, just how many FRS participants do you think have their accounts audited?

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