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How do you show fixed rate vat on accounts

If a client is on standard accounting then the vat is deducted from the sales and the relevant expenses and vat is not shown at all on the profit and loss account.  With fixed rate vat, I have always shown it as an expense on the profit and loss account, how does anyone else show it.  I do not feel it is right to deduct from sales as it is a special scheme, it would reduce the sales value but the expenses would include vat.  The treatment has been queried by a bank manager/financial advisor.


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12th Nov 2011 16:14

As far as I am concerned, there are two methods

Either show both sales and expenses gross, with the FRS payments being shown as a separate item of expenditure, or show both sales and expenses net, with the difference arising on the VAT control account again being shown as a separate P&L item (hopefully a credit).

This is an issue that has been debated over and over but, depending on the accounting system, I prefer the latter as it enables one to readily confirm whether or not the FRS is saving the trader VAT.

It is claimed that this method defeats the stated purpose of the FRS - to ease the administrative burden on small businesses. That may be true, but I can count on the fingers of one hand the number of clients that joined the scheme for that reason, without any thought as to the VAT savings it might bring.

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By Luke
12th Nov 2011 17:08

I have a different approach

Turnover shown gross less FRS VAT payable and expenses are shown gross. 

So in the example of £1,000 sales and £100 expenses (both net) on 10% flat rate it would show as

Turnover (i.e. £1,000+20% VAT)1,200 Less FRS VAT paid at 10% of gross-120 Turnover per accounts 1,080   Less expenses -120Profit 960

I don't actually show the FRS VAT in the accounts at all.  Turnover would just show as £1,080 and this I believe accounts for the fact that the deal is you only pay a certain % on turnover in exchange for not reclaiming VAT on expenses.  I believe this accords with the accounting policy of "Turnover is shown net of VAT".

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12th Nov 2011 17:27

No hard & fast rule

We have a slightly different experience from BKD in that we and clients value the benefit of not having to firstly decide if VAT applies to expenses and then record it.  A keystone of the FRS is that you can not reclaim most input VAT and so we do not record it.  

I can see however that some might want to know that they are actually saving money using it but we tend to just do some rough calculations to indicate yes or no.

In our simple cases we take the total invoiced turnover in the year including standard VAT and then deduct the Flat rate VAT due on it to give P&L turnover.  This creates a credit to the VAT account and payments are made against that which, because all ours are on cash accounting, will leave a balance representing the FR VAT payable on debtors. [edit - ie as Luke above]

Several of our clients use FreeAgent (Iris OpenBooks) and it too ignores input VAT but uses a slightly different basis for VAT on turnover.

When the invoice is raised it records it as standard, ie net to sales & full VAT to VAT control.  Then, when the invoice is paid it calculates the Flat Rate VAT due and automatically moves the  surplus credit out of the VAT control to "other income".  The only problem with this from my point of view is that the VAT surplus is not recorded as income until the invoice is paid, whereas, to my mind it should be taken in the year of the invoice and so, if material, I'll do a year end journal debiting VAT liability & crediting other income with the surplus VAT on debtors.

As I say however, I don't think there is a hard & fast rule on this and I'd be interested to know how other accounting systems handle FR VAT.  We alsouse QBs 2008 which doesn't handle it and Sage isn't allowed to cross the threshold.



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12th Nov 2011 17:33


I think that is exactly the method mentioned by the OP. Although I would accept that there is no single "correct" way of accounting under FRS, I do believe that is the least correct of the three.

For starters, I have a natural resistance to mixing net income with gross expenditure. If in "expenses" you include cost of sales, the accounts will effectively understate the gross profit. In some circumstances, that could be critical.

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12th Nov 2011 18:44

there is only one way

and that is to net the VAT payments against sales.

Your sales and costs are shown gross ie including VAT.

To do it any other way defeats the whole object of the scheme and wastes time doing unnecessary book-keeping or accounts work.

It is a simple calculation at the year end to work out any profit or loss on the scheme as a whole.

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12th Nov 2011 19:01

Simple calculation?

Tonykelly wrote:

It is a simple calculation at the year end to work out any profit or loss on the scheme as a whole.

How? If you have no record of your input VAT, how can you possibly 'simply' calculate your FRS profit or loss? You may be able to make an informed estimate, but that is not the same - I've seen a number of such estimates that were quite far from the truth.

As I said above, it's a matter of choice - particularly if one is using appropriate software, the additional 'effort' to maintain records on a net basis is trivial. The point is that, contrary to Tony's suggestion, there is more than one method - you simply adopt the method that works best for you.

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By Luke
14th Nov 2011 10:54

Same approach?

I think Paul Scholes, Tonykelly & I all have the same approach ultimately, don't we?

Paul - VT doesn't handle FRS either so we run the same way as you, with the net turnover going to sales and the output VAT to the VAT control account.  We then do journals with each VAT return, or teach clients how to do them if they do their own VAT and use VT.

I dont' use sage regularly but don't think that it handles the FRS either.

BKD - I am not keen on your method as in the example of a £120 expense (gross) it would show as £100 cost and £20 to go towards the profit/loss on FRS.  In actual fact the client buying that item really does cost them £120 as they can't reclaim the VAT so I believe it should be shown as a £120 cost against postage or whatever category.

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14th Nov 2011 12:31

As far as I'm concerned

Luke wrote:

BKD - I am not keen on your method as in the example of a £120 expense (gross) it would show as £100 cost and £20 to go towards the profit/loss on FRS.  In actual fact the client buying that item really does cost them £120 as they can't reclaim the VAT so I believe it should be shown as a £120 cost against postage or whatever category.

I think it's all a question of semantics. The application of the appropriate FRS rate does effectively allow the trader to recover input VAT on his costs, by applying a lesser rate of VAT to his turnover. I can understand all arguments for and against all treatments - as I say, the method that I prefer I prefer only because it gives an instant and accurate indication of the FRS saving (or loss).

But I do not like the idea of mixing net turnover and gross expenses, partly because of the potential distortion. Further, if one argues that expenses should be shown gross because the trader cannot recover input VAT, then sales should also be shown gross, because the trader does not have to pay over output VAT. (What he has to pay over is simply a quarterly sum that just happens to be based on a formula involving turnover - the fact that it is shown in Box 1 of the VAT return does not, in my view, make it output VAT, a view that seems to be shared by HMRC - "you are calculating net tax without reference to output tax and input tax".).


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By cfield
14th Nov 2011 13:04

Adding value

As one of the previous posters said, most firms only join the FRS if they can save shedloads of tax, not for the reduced admin. In any case, most firms employ accountants to do their VAT returns (either externally on on the payroll) and any time saved does not benefit the client unless it is reflected in lower accountancy fees or by their staff having more time to do other work.

Accountants should use the FRS as a way of adding value to their services. Demonstrating that a client is £££ better off under the FRS always puts them in a good mood and can even earn you higher fees for saving them tax.

We always show the FRS gain as a separate line in the management accounts and add it to turnover in the Stats. To me that is the purest method even though HMRC suggest deduction of FRS from turnover with no input tax entered.

Does it really save much time not posting input tax (which is usually done automatically) or basing output tax on bank receipts rather than invoices where clients are on cash accounting? In the latter case, you have to work out the VAT position at the year-end anyway.

Our systems are already geared up to calculate VAT under the standard method at the press of a button so I don't see that admin is much reduced really, especially for the smaller clients the FRS is aimed at. All you have to do is take the gross outputs and apply the FRS rate, then journal the difference to FRS Gains.

It should be remembered that clients can opt out of the FRS at any time (or re-join after a year) and if that happens the historic figures for sales and expenses are not going to be comparable if you follow the HMRC treatment.


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By Luke
14th Nov 2011 14:03

Just proves there is no black or white answer

I can see what you mean BKD, and I get where you're coming from.  Neither of us is wrong we're just coming from slightly different angles.  At the end of the day our clients will all show the same net result.

Chris - I agree totally,  I love the FRS for its simplicity of saving a client money without much effort (obviously not all clients).  I have one client who is continually amazed at saving about £1.5-2k pa each year, yet none of his friends in the same business are on the scheme.  He thinks I'm the best thing ever!



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