Flat rate accounting

Under the flat rate VAT system, VAT is computed on the VAT Inclusive turnover instead of being part of the Gross invoice Value. The example given by HMRC in the guidelines states that if the VAT inclusive turnover was £10,000 and your FLat rate was 8%. The VAT on Flat rate would be £800.  How would you post this on Quick books.

I thought that the VAT was inclusive therefore I would have taken £10,000  as the Gross, requesting the system to compute  the VAT( 8/108 times £10,000 = £740.74). It seems if you follow the HMRC guidelines  you may need to adjust the rate in order to reconcile the VAT figures and End of year accounting figures. What do you think?

Comments

Flat Rate VAT    1 thanks

Karen Warne | | Permalink

If you are operating flat rate VAT in QuickBooks, and also using it (as you should) for Bank Reconciliations, you have to enter Sales and Purchases as if you are not using flat rate VAT - otherwise you can't reconcile the bank.

At the end of the VAT quarter, print off a VAT 100, add together Box 1 and Box 6 and work out the flat rate percentage (e.g. Using a flat rate percentage of 8.5%,   Box 1 £17.50, Box 6 £100.00, flat rate VAT will be £9.40.  You then use the Adjust VAT function to reduce the VAT in Box 1 to £9.40 (reduce by £8.10).  I have created two VAT Adjustment Accounts :  VAT Adjustment Sales (as an Income Account) and VAT Adjustment Purchases (as an Expense Account).  The adjustment account is VAT Adjustment Sales.  You then have to repeat the process with purchases but in this case you simply adjust the whole VAT amount to the VAT Adjustment Purchases account.

Its a bit long winded and fiddly but you only do it once a quarter and its the only way I have found that works, and gives you an audit trail.

Be interested to know if anyone else has found a better solution?

 

Karen

FRS calculation

ch2204 | | Permalink

Your calculation works on the VAT element of sales of £10000 if the VAT charged was 8%.

This works for example on 17.5% VAT as you have to pay the VAT man the VAT charged.

For Flat Rate the amount you pay is not the same as the amount charged.

That is the benefit of the scheme.

You are charging the customer say 10% but only paying the VAT man 8%.

Eg. If you were charging 10% on inclusive sales of £10,000 the VAT would be 10,000 x 10/110 = £909.

If you weren't on FRS you would pay £909.

On FRS you pay £10,000 * 8% = £800. The calculation is on the inclusive figure but you pay less.

When you come to calculate Corporation Tax the turnover is calculated on the Inclusive value but is adjusted for FRS savings.

Hope this helps

carnmores's picture

which version of QB are you using

carnmores | | Permalink

you can make adjustmenst in the VAT account on later versions so let me know

coolmanwithbeard's picture

Flat Rate Scheme

coolmanwithbeard | | Permalink

You need to use QB a little differently to operate the Flate Rate Scheme (frs)

Set up to charge VAT in the normal way but do not reclaim any on anything. This means your invoices and sales receipts will charge and print correctly

As on the frs vat is calculated on all income set up stuff like interest as zero rate so it will appear in your report (or add manually later)

Your VAT report will then give you net vat at box 1 3 and 5 and your net at box 6 but under standard calculation rules. The next bit is done off system.

BAckup now so if you get this bit wrong u can go back!!

Print off your vat report

Add your vat and net (boxes 1&6) then add any other income if you have not put a vat code on it to add into box 6 figure

This is your gross for the frs and your new box 6 figure for your return (A)

Multiply (A) by your percentage - this is the VAT you owe(B)

Subtract the vat you owe (B) from the amount calculated by qb at box 1 this is the adjustment you must make on QB - using adjust VAT on QB you can adjust the amount at box 1 at the appropriate date. Simply reduce box 1 by your adjustment - make the adjustment account one of your income accounts or a new adjustment account if you want. Once you have done this you will see that your VAT 100 report will show the new amount of VAT (B)

You can then file the VAT in QB but do not use QB to file online with HMRC as you are unable to adjust the figure at BOX6 on QB and so your return will be wrong.

To file your return online you will need to use the HMRC website - you put figure B in box 1 and A in Box 6

Hope this is clear - it's fairly simple once you've worked through it

 

Mike

www.quickbookshelp.co.uk

 

 

Flat rate accounting

amutyaba.yahoo.com | | Permalink

Thanks for the comments. They were really very helpful. The VAT is done on Excel therefore the VAT computations are okay however, I was concerned on how to post the invoices on QK 2008 such that the value of the invoice doesnot change which had an effect of overstating  Net Sales and understating the VAT figures if the invoices are posted in the normal way as explained in the example given.

I agree the best way forward is to make adjustments. First, by recording sales and purchases presumably Zero rates on Quicks books, post a journal for the Sales VAT computed by debiting sales and crediting VAT account and finally file a return on Quick books such that VAT is transfered to HMRC VAT accounts payable Account.

 Best wishes

Alex

 

Malcolm Veall's picture

Company Accounts

Malcolm Veall | | Permalink

Are you a Limited company?  If so, the annual accounts should include Sales net of VAT, which means net sales value, not Gross sales less flat rate VAT paid over.  Your accountant should be able to sort this but there is a lot of confusion on this issue.

If you are a sole trader/partnership there is almost complete flexibility in how to include the figures in your self-assessment pages of your tax returns.

petersaxton's picture

Gross price less VAT payable to HMRC

petersaxton | | Permalink

Malcolm

I disagree. I am of the opinion that your sales are the gross price you charge less any VAT you pay over. HMRC recommends that on their website regarding flat rate VAT.

The usual way of accounting for VAT is simply because the VAT charged is payable to HMRC.

petersaxton's picture

What is the relevant VAT amount?

petersaxton | | Permalink

 Malcolm

I don't think there is any doubt that sales should be shown net of VAT. What is at issue is the amount of VAT.

If a flat rate VAT registered person charges £117.50 (including VAT) and the flat rate VAT is 10% I think it is reasonable to show net sales of £105.75 (£117.50-£11.75).

Malcolm Veall's picture

Companies Act

Malcolm Veall | | Permalink

Peter, sorry if you saw the previous version of this, where the cut & paste produced gobbledygook; I'll type it out the old-fashioned way!

What HMRC say is irrelevant for Companies Act  compliance.

Turnover is defined by s474 CA2006 as:

"the amounts derived from the provision of goods and services...after deduction of:

(b) value added tax.

 

I have in the past consulted ICAEW technical enquiries and Mercia on this and their unequivocal view is that this means the normal net sales value.

carnmores's picture

quickbookshelp

carnmores | | Permalink

whats all this about not being able to adjust box 6? if you are using the latest versions of QB 2008 2010 you can adjust your vat reurns thro the amendment routine - we did this and filed on line and everything is properly recorded.

one other thing turnover is without vat of any sort or amount

petersaxton's picture

Response

petersaxton | | Permalink

Malcolm

I saw it.

Did you see my response?

Malcolm Veall's picture

Turnover - Peter

Malcolm Veall | | Permalink

Peter,

Sorry, did not see it before I re-posted mine.  I understand your point & that was exactly the argument I put to technical enquiries, (had another chat with them before my second post), although really as devil's advocate as I agree with them. 

They were just about prepared to see that your scheme was a tenable interpretation of s 474, but were clear that it was not the meaning of the definition.  Certainly they said that it would not fit with an accounting policy of: "Turnover is stated net of VAT" as the world at large would definitely read that as Turnover = the net amount invoiced.

Also would mean re-stating comparatives in year of adoption.

 

As I said to tech enquiries the problem with this issue is that, as it only affects small businesses, the big money/brains from the big firms who influence ICAEW & ASB have never even thought of it as an issue.

petersaxton's picture

No invoice

petersaxton | | Permalink

Malcolm

What about if the amount wasn't invoiced? 

Malcolm Veall's picture

No Difference

Malcolm Veall | | Permalink

The priniciple is the same.

I explained to tech Enqs that a small cash business, eg hairdresser, would never invoice & with FRS would never need to record anything net of VAT &plus they would not understand what the FRS adjustments were about as Standard VAT accounting is not something they have ever grappled with.   But then the trader is nto the only user of the accounts.

What I do in the stat accounts, Peter, is estimate the amounts that would have gone from Sales & Costs to VAT Control & write this off versus the FRS payments - the net FRS benefit appearing as a separate credit, below Gross Profit.  For Companies Act the only requirement is for the Statutory headings to be materially right, does not matter that the amounts taken out of VATable costs is approximate in the detailed anlaysis of expenses.  Only takes a few mins & one journal in my softeware & the client can keep to using simplified records

petersaxton's picture

Actuals v estimates

petersaxton | | Permalink

Malcolm

I agree that the principle is the same.

I am still happy with the way I do things. It's a very strange concept to "estimate" the benefit of the FRS and include that as a separate line in the accounts. I am glad I use actual figures in the accounts: gross sales less VAT payable to HMRC.

How do your technical experts say you should account for all relevant amounts when using the FRS?

Assume the following amounts:

Sales £100 + 17.5% VAT

Costs £35 + 17.5% VAT

Costs £25 + 0% VAT

FRS 10%

If not FRS:

Sales £100

Costs £60

Profit £40

I would produce the following accounts:

Sales (£100.00 + £17.50 - £11.75) £105.75

Costs (£35.00 + £6.13 + £25) £66.13

Profit £39.62

What would your calculations be? I know that you can come up with precise figures in the above example but how would you do it when you only knew the Costs were £66.13?

 

Malcolm Veall's picture

Turnover

Malcolm Veall | | Permalink

Peter,

I definitely don't want to get into an argument here but I should point out that ICAEW Tech Enquiries & Mercia are not my technical experts, they are the profession's technical experts.  I have tried to stimulate discussion on this topic on Aweb before & there are clearly divergent treatments being used.

The experts I have consulted are all are very clear that, using your example figures, any accounts that include more than £100 in turnover are in breach of s474 CA2006.

My accounts would include:

Turnover:       £100

Costs              £60

FRA surplus w/o below Gross Profit line: Output VAT £17.50, less Input VAT £6.13, less paid HMRC £0.38

Profit               £39.62

The Net Profit will always be exactly the same.  the only estimation is in terms of coming to net amounts for individual costs.

Apologies to the OP, clearly this is not a QBks issue, although it is a very common issue these days, where the figures the y/e accountant works from vary depending on the accoutning sytem used by a FRS using company.

 

 

petersaxton's picture

Experts and the Companies Act 2006

petersaxton | | Permalink

“I definitely don't want to get into an argument here”

This is an argument but it’s a professional argument and I’m not getting upset by it.

“but I should point out that ICAEW Tech Enquiries & Mercia are not my technical experts, they are the profession's technical experts.”

I used “your experts” in the sense that you were consulting them – not that they were some kind of your own in-house think tank.

Clearly, “experts” should be given appropriate weight but given this is a subject we should know a fair bit about then it is reasonable for us to expect they are able to convince us by strength of argument. I’ve not seen any evidence of that so far.

“I have tried to stimulate discussion on this topic on Aweb before & there are clearly divergent treatments being used.”

Agreed

“The experts I have consulted are all are very clear that, using your example figures, any accounts that include more than £100 in turnover are in breach of s474 CA2006.”

I disagree with them.

S474 CA2006 says:

“turnover”, in relation to a company, means the amounts derived from the provision of goods and services falling within the company's ordinary activities, after deduction of—

(a)     (a) trade discounts,

(b)  (b)value added tax, and

(c)  (c) any other taxes based on the amounts so derived;

You can argue about the relevance of letters and commas but I take that as saying it is reasonable to take an amount of gross sales (including the calculation of VAT) and deduct the VAT payable.

An interesting aside is who is being taxed and by what amount. Is the customer is being taxed at 17.5% or is the effective tax based on the FRS percentage? In this case the 17.5% is not a tax and the only economic percentage is the FRS percentage. The 17.5% comes into no calculating except including it on any invoice and maybe recorded by the customer. Therefore, is the FRS percentage the tax and who is being taxed?

“My accounts would include:

Turnover:       £100

Costs              £60”

So, despite being on the FRS you would extract VAT from your costs? Or are you just saying that would be your calculation if you had the time and the information to do so? This is contrary to the whole concept of the FRS. Before you say “HMRC don’t determine accounting policy” I still think that it is sensible to not strip VAT out of all transactions when accounting under the FRS.

Malcolm Veall's picture

Agree to disagree

Malcolm Veall | | Permalink

Peter,

I understand your interpretation but I am prepared to be guided by my institute on this one, especially given that I have spoken to at least three different consultants at ICAEW on this topic as well as to Mercia.

They all agree that it is acceptable to either extract VAT from costs & have a net benefit write-off or record costs gross & have a write-off of the FRS VAT paid, but not within the turnover line.

I do value your input - having read many of your other, very useful,comments on AWeb over the years but I don't think we are going to take this any further without anyone else venturing an opinion.

 

petersaxton's picture

Why no more comments from people?

petersaxton | | Permalink

Whereas everybody else gone. I think this is an important issue and also subject to various interpretations.

For what it's worth...

tltodman | | Permalink

... I show the flat rate scheme credit as Other Income. 

I enter all the sales and purchases just as normal with input/output VAT going to VAT control account.  At quarter end, I calculate the flat scheme VAT liability, compare with standard scheme liability shown in the books, pay what I owe under the flat rate scheme and write off the credit to Other Income, which is analysed in my detailed P&L as flat rat  VAT scheme credits.

Since I file online using HMRC system I manually enter the box 1 and 6 flat rate figs and it's sorted. Though could see why this wouldn't work if you were filing direct from your accounting package.

Tracy

 

 

Include as turnover

anavrin | | Permalink

I include the vat surplus as part of turnover and record all costs gross.

I think from memory I based this on HMRC guidance found here:

BIM31585 - VAT: flat rate scheme 

Expenses will probably be shown inclusive of VAT as it is irrecoverable (similar to a business not registered for VAT), and it is likely that turnover will be shown net of the flat rate VAT payment. You may however find that the flat rate VAT payment is shown as a profit and loss expense rather than deducted from total turnover.

Example

A business has gross sales of £94,000 (including output VAT at 17.5% of £14,000), and expenses of £58,750 (including irrecoverable VAT). The flat rate VAT @ 6% is £5,640. The accounts will show:

Turnover £88,360 (94,000-5,640)

Expenses £58,750

Profit £29,610

Back to me again - I think it can be done either way being discussed but for me, including it as income and part of turnover makes most sense and it's probably immaterial anyway so not too much to worry about. 

 

 

petersaxton's picture

The example makes sense

petersaxton | | Permalink

The example above is how I do the accounting.

It makes sense to me.

 

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