I thought I'd covered everything in FRS VAT then this turned up.
With a normal UK bad debt, when using FRS VAT, the trader claims back either the full 20% VAT (if invoice accounting) or the difference between the 20% VAT and the FRS VAT (if cash accounting). So, if there's an invoice for £100 + £20 VAT and the FRS is 10% the invoice accounting trader pays £12 then gets £20 back, whereas the cash accounting trader just claims £8 back, leaving both in the same boat.
So what about an overseas sale where no VAT was charged, can the trader get anything back and if so is it still based on the full 20% less FRS?
From what I can tell, the legislation says that the trader can reclaim the full VAT charged on the supply less the FRS VAT, but with an overseas sale the VAT charged = £0 so, mathmatically, has to suffer the FRS VAT and worse, if cash accounting, once the debt is written off has to pay over the FRS VAT.
Alternatively, being sensible, the cash accounting trader never pays any VAT and so the invoice accounting trader just reclaims the FRS paid over in the original VAT return.
BUT, who says FRS VAT is sensible and maybe, as with say the VAT you pay over in Box 2, it's a cost of using the FRS?
Preying someone has had one of these in the past.
EDIT: Sorry meant sales of goods overseas and then realised of course that zero rated and exempt items are included in FRS turnover so it applies to them as well and so maybe there is no relief?
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Right then....
I have just spoken to those nice people at CCH tax helpline and they too can find no commentary or opinions on this and so, as so often with FRS, you are stuck with the legislation which says that, under FRS, the bad debt relief is the difference between the VAT charged on the supply and the FRS VAT, in other words, for 0% VAT sales, there is no relief, it's lost money.
Which means that for the client I'm dealing with, on FRS cash accounting, they have to pay over the FRS VAT as if the cash had been received.
Unless anyone else has had experience of this with HMRC, I think I'll ask for a written opinion from them, it all seems so daft.
Interesting
I think it would be worth getting a ruling. The more and more I look at the FRS, the less I want to advise people to use it. It has the facade of simplification, but is sometimes a wolf in sheeps clothing!
I can hear howling!
Yes indeed Doctor, CCH said that FRS is the most popular topic for VAT queries and I seem to have spent weeks out of the past few months investigating it.
To show how weird it is, I only discovered last month that if you deregister from VAT whilst in FRS you have to come out of FRS VAT accounting the day before then apply standard VAT on your last day. There's a good reason but I've forgotten what it is!
Thanks andy.p but that's an old trick specifically prohibited
Outside the scope of VAT?
Why was no VAT charged on this "overseas sale"? Was it because it was zero-rated, exempt or outside the scope of VAT?
Edit: Trimmed text
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Hi - here you go = zero rated
With the present rules, you're stuck. There are many swings and slides to FRS - or should that be snakes and ladders?
Can I suggest that, if you appeal/request clarification, Paul, you describe the sale as zero rated, not "where no VAT was charged"?
@Triggle
Hi - not sure I understand, do you mean you wouldn't claim the VAT back on bad debts in general?
This is particularly relevant to most FRS sales in that, even if you cash account, and so haven't paid over any VAT over on the sale, if it goes bad you can claim the difference between the 20% charged to the customer and the FRS VAT you would have paid over had the debt been paid.
In the case I question however it seems like you have to over VAT but can't get any back if they don't get paid. Really all I want to know it whether this is right so that I can advice clients who don't take the view that an optional relief is not worth claiming.
Hi Paul
Yes, I am aware of the FRS VAT bad debt rules. They were factored in when HMRC came up with the trade sector percentages. So yes, even if you didn't receive the amount invoiced for, you still get a deduction under the FRS when you claim VAT bad debt relief.
However, I wouldn't claim the VAT bad debt relief in the case you describe as I agree with you that under the FRS rules this would mean your client actually paying for the privilege! I don't think HMRC have thought it through (no surprise there then).
I would, however, still claim the bad debt relief for income tax/corporation tax purposes (specific trade debt and all that).
Thanks both
The other aspect to this is what do accounting software companies do in these circumstances? The trader (and probably their accountant/bookkeeper, if they have one) will assume that the regs are built into the software, so that they don't have to worry, but I doubt this is always the case.
I'll be testing this out on the systems I use but am not holding my breath.
@emanresu yes, I did use zero rating as my example when I wrote to HMRC but again, am not holding my breath.
In reality this is likely to only effect a small number of businesses but, as you say, FRS hides its complexity behind a screen of simplicity and I wonder what else is unwritten.