Flat rate VAT accounts

Flat rate VAT accounts

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Should I show the barrister's fees correctly and apportion the vat across the expenditure, or take the vat due from fees and show expenditure gross?
Taking the vat due from takings on pub/retailer would affect the GP%
Any suggestions?
Chris Wood

Replies (6)

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Euan's picture
By Euan MacLennan
02nd May 2007 13:52

This keeps coming up
You could try searching Any Answers, but the short answer is that you show all income and expenditure gross and deduct the flat rate VAT paid over from the sales.

PS

I have now done a search. It brings up thousands of threads. This one is clearer than most:

Accounting for VAT flat rate scheme

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By martinfoley07
03rd May 2007 19:36

I'm not cynical, but sceptical....
...about the reasons advanced for the introduction of FRS.

When first introduced, the whole thing was indeed bizarre, because the policy was that FRS was to be revenue neutral for C&E (as was).
Talk about muddled thinking ; how anyone truly came up with a voluntary scheme that must be revenue neutral beggars belief. Let's just be kind and say it under-estimates the basic intelligence of human beings. No wonder the Treasury does not understand how to dream up tax schemes that work as they would like.

Then of course it was ackowledged this was nonsense, and percentages were changed to get a higher take-up of the scheme.

But, without looking a gift horse in the mouth, was this truly a scheme designed with the objective of lowering the burden on small business? Bearing in mind it was designed to be revenue neutral. Er, the answer is pretty self-evidently no, even if some small businesses did welcome the opportunity.
I personally believe the clear reason for the introduction of FRS, without needing to be cynical about it at all, surely was that the inspection effort and cost to C&E/HMRC for small businesses is slashed - they just have to do some very basic checks on sales,and can forget the nightmare of trawling throug brown paper bags of sticky unreadable receipts. Coupled with the fact that 99% of innocent errors on VAT in small businesses were always on wrongly claiming VAT input relief (eg postage stamps , travel, insurance, motor, etc etc) and thereby underpaying.

So HMRC win by the FRS - and my God, they would win hands down if it were possible to have it revenue neutral !!!
But if as a side benefit some small businesses find it easier to keep their records via FRS, all well and good.
A win/win situation. Now that is rare, and pleasing for all.

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By Adam Upp
02nd May 2007 18:16

Thanks
Thank you Euan

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By User deleted
04th May 2007 12:18

cynical
Very interesting points Martin. Maybe it wasn't quite as mad as it might have seemed.

In a budget speech a couple of years ago, Gordon Brown triumphantly announced the shedding of 40,000 jobs in HMRC (coincidentally in the same week another government minister, Tessa Jowell maybe, was almost in tears (crocodile) about 1,000 car workers being made redundant in Luton, but that's going off track a bit)

Maybe the attampt to make VAT easier to do, and therefore check and inspect, was the preamble which they knew would cost a lot, but less than some of those 40,000 wage bills.

It would be interesting to know how much FRS is costing the government. In my small practice with only 80 VAT registered clients, I would estimate my clients together collect at least £50,000 pa in free money. Throughout the country, the cost must be astronomical surely.

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By User deleted
02nd May 2007 18:49

Show in P&L
I agree totally with what Martin Foley says - I think the suggested way of dealing with it makes the accounts misleading. IMO the expenses and sales should be shown net, as they were before, and the profit on FRS shown as a credit on the P&L. (Obviously you have to gross up any fixed assets to get the correct tax treatment)

Surely the most important figure in the accounts, the sales figure, should be the actual net sales, not some obscure gross less FRS payments amount.

This means that eg accounts fees don't shoot up from £1,000 to £1,175, and also the profit from the FRS scheme is shown clearly so that the client knows how much your advice about joining FRS is saving them.

And Martin is right, inevitably you have to keep the books as before (net amounts) to work out the profit to check to see if it worthwhile being on the scheme, especially when they suddenly change the percentages.

So the scheme that was invented to simplify book-keeping has increased our workload at a huge cost to the government, but with a lot of free money for our clients. I vaguely remember circumstances enabling one of my clients to have a profit (free money) of £8,000 in one year.

A bizarre idea in the first place I'd say.

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By User deleted
03rd May 2007 10:03

Response to Driscoll
The points you make are valid and a lot of people (myself included) probably do run the flat rate scheme to save money. However, the FRS was introduced to make VAT accounting more simple for small businesses that could not afford specialist accountancy help. To this end I think it has been successful, particularly with respect to whether expenses are VAT allowable or not. Plus you can ignore such complications as VAT fuel scale charges.

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