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VAT Flat Rate - confused about the accounting

I'm new to the VAT Flat Rate, and one part is leaving me confused.

E.g. Turnover = 100,000 + VAT 17.500 = 117,500
VAT on flat rate @ say, 11% £12925

What number goes on the P&L account for turnover? Is it £100,000 or is it £104,575 (total turnover - VAT paid over)?

If it's £100,000, where does the £4575 go?

I can't get my head round the double entry for this (and flat rate is supposed to make things simpler!)

Any help greatly appreciated.

Faerie Girl


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Bank interest is only mentioned in a gross turnover test.

That does not mean that it should be included in the turnover for calculating the flat rate VAT.

Does it ?!

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Don't forget...
Don't forget to account for Flat Rate VAT on all business income, not just sales.

Includes bank interest received & rental income - often overlooked & not made clear in the examples given by HMRC to illustrate the FRS.

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Numbers might not reconcile
Hi Mahmood
You might have a problem. If your clients have paid net sales of £40k then you would enter in Box 6 £47k, but you would pay £3,995 (£47k x 8.5%).
If you have actual receipts of £40k, you are right that the VAT payment would be £3,400, but your figure in Box 6 would be only £40k, not £47k.

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Flat rate and cash basis
Yes, I would say your second alternative is the correct approach.

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Cash based FRS
I have spent almost 2 days learning to deal with FRS within Sage. The solutions proposed in articles published by Sage don't work and in the end their VAT team suggested that I make manual journal entries.

The comments you all have posted are very helpful but don't address the issue of cash based FRS. I am setting up Sage Instant Accounts for one of my clients and am going to do their VAT return as well.

If we assume that the client has invoiced a total of £100,000 then the amount stting in VAT control is £17,500. But the client has only received £40000 and VAT payable at the end of the VAT quarter is £40,000 x 8.5%=£3400 (assuming a flat rate of 8.5%).

My question is:
Should the sales appear as £117,500-£3400= £114,100 or will they be £117,500-£9987.50=£107,512.50.

My guess is that the second treatment is correct and I would make the following journal entries to clear the VAT account.

Dr VAT Control £17,500
Cr Sales £9987.50
Cr VAT FRS £9987.50

Record Payment of VAT to HMRC

Dr VAT FRS £3400
Cr bank £3400

Also on the VAT return itself the total appearing in Box 6-Total Value of Sales will be: £40,000 + (£40,000x.17.5%=£7000)=£47,000.

Please do let me know if this is the correct treatment for cash FRS.

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vat flat rate
you will always get differences of opinion in this area, as there is more than one way of dealing with it.
the simplest way is to record sales and expenses gross and offset the vat payments against the sales.
don't forget to accrue for the vat creditor.
job done.

having said that, I do have one client who religiously analyses the input vat on purchases, as they used to before joining the flat rate scheme. this is so that they know how much they are saving by being on the scheme.

the other thing clients tend to do is to calculate the VAT on the net sales rather than the gross. this is a fairly common error.

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agree to disagree
So we all seem to disagree . But as long as the tax is right, does it matter that much ? The profit on the FRS has to go somewhere, and I understand Euan's argument about showing gross expenses. But I will argue til my dying day that the sales figure must be the actual sales of the business. The accounts are not just for HMRC. Even my most disinterested client is interested in their annual sales !

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The practice adopted by Driscoll makes sense to me for the purpose of producing comparable accounts.

I never did figure out if the guy who said he posts any gain realised under the FRS to a directors loan account was serious or not.

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Steven's unilateralism doesn't help
Steven I often agree with you, but not this time. As you say, two companies, one a non FRS and the other using FRS, otherwise identical, will show different turnover and GP.

If BOTH companies use FRS, but you happen to do the accounts of one and, say, Euan does the other you will still get a different turnover and gross profit. Sadly, your unilateralism only adds to the 'nonsense' and doesn't solve it.

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HMRC approach is incorrect.
If you compare two identical businesses one using FRS and one not then their turnover / gross margin will be different if you use the HMRC prescribed method .... idealogically that's a nonsense.

I would never insist a client spent time / money on unecessary bookeeping but I will always revert turnover to the correct (net) value of sales in the period and show the difference in 'other income' below the GP line. Anyway, since when did HMRC qualify to issue accounting standards?

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I agree with your comments Euan

..and we certainly didn't use the description Profit from using the Flat Rate Scheme because, as you say, that would be misleading.

We wanted to have consideration as to who the users of the accounts were. For the unincorporated business this will, in most cases, be only the owner(s).

Many were only interested in two figures - turnover and profit. That is why they preferred to see the true figure for turnover rather than HMRCs solution.

All this is now historical for us but I see little problem for others who choose a more meaningful format for their clients.

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Stating expenses net is wrong
Input tax on expenditure is not recoverable under FRS in most cases and it is simply incorrect to include expenses in the accounts at anything other than their gross amount inclusive of VAT.

Although I can understand some discomfort at the compromise of reporting sales gross less the VAT FRS payment, the alternative of stating sales net of VAT and including a separate line for "VAT", being the difference between the output VAT charged on sales at 17.5% and the FRS payment, is no better. It would certainly be misleading to describe the VAT line as the profit from using FRS because it does not include the cost of the input VAT foregone on expenses.

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My understanding was..

.. the guidance on how to record the sales, as outlined below, was suggestive rather than prescriptive.

When the FRS was first introduced I did not like the suggested route either. I preferred to report sales net and have an additional expense code for what is effectively the input VAT recovery equivalent under the FRS.

This may even have been in initial material from HMRC as an option.

However, nowadays putting it all to sales seems to be the generally accepted practice and so this is what I now do.

I think Andy Partridge is going a little over the top to suggest that Driscoll is doing something highly irregular given that the net effect is the grand sum of zero.

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Interesting, Driscoll
You know how it should be done, but you don't do it because you don't agree with it. Is that your firms policy? Does it extend to other areas eg. tax-deductible client entertainment, IR35, etc.

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If the sales are £100,000, I really hate the idea of producing a set of accounts saying the sales are £104,575 or £117,500. They clearly arn't, and so it just doesnt make any sense. And if the client is VAT registered and you charge them £1,000 + VAT, how do you explain that the accounts fees in the accounts have increased to £1,175 now. I know the guidance from HMRC tells you to do that, but I think it's a bit ridiculous myself.

So our firm does the accounts as they were before, with net amounts, and then show the profit from being on the scheme separately in the P+L. This means:-

a) The accounts are consistent with the prior years
b) It doesnt affect the tax and so HMRC wouldnt care.
c) The client can see exactly how much free money you've got for them by putting them on the flat rate.

The only problem is that capital allowance additions have to be grossed up, but the scheme doesnt make any sense, and so there will always be confusions.

Incidentally, a client of mine on the scheme for years has just got a job where she gets paid £300,000 over the next two months. Wahey. £14,000 of totally free money from the government for her as a parting gift from the scheme.

Coincidentally, I have another client in the same industry who has just split up with her abusive partner and so has had to sign on. She told me that she gets JSA of £60 a week (I did express doubt/surprise!) for her and her 2 teenage kids.

Why did they ever think it was a good idea ?

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VAT Notice 733 para 7.8 "It is expected that accounts for businesses using the scheme will (show) gross receipts less the flat rate percentage as turnover, and that expenses will include the irrecoverable input VAT."

Inland Revenue Tax Bulletin April 2003 (page 1024) has an example showing the very same method.

That's the way I've always done it & clear enough you would think?

BUT.... the 2006/07 SA Tax Return Guide Self Employment pages illustrates how you can include figures gross or net & advises various ways of treating the VAT element as either income or expense! So no wonder people get confused.

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Flat rate
we show sales gross and the payments made re flat rate VAT within admin expenses within the p&L.

we then accrue for any VAT due on sales if the VAT quarter is not co-terminus with the year end

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interesting differences of view here...
.....but as so often, it is not all black and white.

FRS was not introduced to help small business keep simpler books.
It was introduced to help HMCE (as was) to improve net tax take by significantly reducing the cost of random and targeted inspections of micro business. Instead of fiddling endlessly around with input VAT claimed, often wrongly, often spuriously, often with difficulty, and at wholly disporortionate costs, VAT inspectors can just ignore them.

Relief all round, as it gives a win / win to micro business doing their own bookkeeping where they have no "internal" ability or desire to keep tabs on the situation. (if they have an external accountant, they should of course do an initial and annual back of the fag-packet review to ensure it makes sense for client to go into / remain in FRS).

(i) some micro clients who do their own books do want to keep their own tabs on the profit they are making from FRS, so they choose to do so. Others don't. Their choice, accountant should not care one way or the other, other than ensuring client is clear what and why they are doing whichever method they choose
(ii) if the client has "outsourced" the bookkeeping, it is more than likely the outsourcer does not incur any extra marginal cost by keeping the books "normally". Thus monitoring and recording (at no marginal cost) the benefit of FRS is quite likely to make sense.

As an aside - and not for debate, at least by me - strictly speaking HMRC suggested method of accounting for FRS may not comply with UK GAAP. But a micro client who just wants to use FRS to simplify their own bookkeeping efforts will not care, nor will their accountant (quite rightly).
But if client is likely to "outgrow" the FRS, it will likely make it less easy to compare figures in the year of changeover to standard scheme.

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yes, but
You are correct Euan, and I'm sorry I didn't say exactly what I meant, which is that I would account for the sales in the standard way, and see what 'surplus' was obtained on the output side of things, but I certainly wouldn't advocate analysing expenses into net and tax. It's true that the actual 'profit' can't then be established but one can get a pretty good idea of what input tax has been foregone without detailed analysis.

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I agree with Euan
the whole point is to simplify the process. You decide which way would be most beneficial - and then if FRS, just do the quick and simple thing. Surely one of the benefits of FRS is not having to analyse input VAT out (and therefore save paying your accountant to do it). Analysing input VAT seems a bit pointless. It's a bit like having a dog and digging up the flowers yourself.

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Yes, but
-- If the client uses bookkeeping software to raise the sales invoices showing 17.5% VAT as they are still supposed to do when using the flat rate scheme, then the output tax will be recorded automatically.
So a journal will be needed between VAT control and sales.
Raising sales invoices with VAT shown, then recording them without VAT is surely complicating matters for the small business owner.
I do it the "wrong" way too, but only on the sales ledger. I record expenses gross, sales net+vat, and adjust to the income account at each VAT return.

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Yes, but ...
The point of FRS is to allow the uninitiated client simply to record the gross amounts of his income and expenses and calculate the VAT payable very simply as a percentage of the gross sales he has recorded.

Accountants who advocate analysing all the income and expenses into net and VAT, recording the VAT in a control account and then processing a nominal journal to transfer the "profit" out of the control account are over-complicating the issue, baffling the uninitiated client and costing him more than necessary for the service of preparing his VAT return.

You ought to do the calculation on the figures in (say) a set of draft accounts before joining FRS, but once you have convinced yourself that it is beneficial, leave it alone.

Actually, Paul, the end result of adding the FRS "profit" onto the net sales is not the same as doing it the right way. You will have understated sales and all standard rated expenses, albeit by the same amount.

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missing the point
Perhaps you are, Andy. Surely the aim was to simplify things, and that goes for the client, but equally for the advisor. Some clients really aren't interested in bookkeeping, believe it or not, so the accountant does that, and does the VAT at the same time.

As for doing it the wrong way, once you've sussed out whether the scheme has produced a surplus for you, the credit balance on the VAT account can be transferred to the sales account, and the end result will be the same either way.

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Am I missing the point?
I thought the idea of the flat rate scheme was to enable small businesses to self-manage VAT affairs. It seems some accountants may be reluctant to let go. Why?

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Flat Rate Scheme
I do it the "wrong" way as well, so that I can check that it is still in my clients favour and not HMRCs.

Otherwise, I can't really see the point of us accountants doing someone's VAT for them!


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Yes, that is the correct turnover figure however unlikely and illogical it sounds.
Costs should be shown gross in the P&L. Too much navel gazing (sorry Simon) is, I think, an unnecessary distraction.

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Thanks Simon, that makes sense.

And yes, if it were my business, I'd be inclined to do the same!!

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Sales should be gross
You should record the gross sales, i.e. 117,500 and then when you pay the FRS VAT you debit sales (or an account set up for this purpose) leaving you with net sales of 104,575 so that you pay IT / CT on the 104,575 rather than 100,000 (assuming no costs of course).

Personally I prefer to record VAT the normal way (which I understand is incorrect) so that once I've paid the VAT, the balance on the VAT control account tells me whether I've made a profit or loss using the scheme.

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