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CT impact of a FRS VAT correction

What is the correct way to manage a correction to a FRS VAT submission which impacts corporation tax

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We used an incorrect FRS rate for our participation in the VAT flat rate scheme last year. We corrected this in the last return period and paid the additional VAT due.

However, this also means we have paid more corporation tax than was due on the Flat Rate Scheme Adjustment Account (the difference between 20% and the FRS rate used, which is treated as income). 

What is the correct way to adjust this? Should we put through a correction to last year's CT submission, or should we include it in the current return (when the correction was identified and additional VAT payment made)? If the latter, do we just credit the FRS account and reduce taxable income in the year? 

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RLI
By lionofludesch
25th Jul 2021 18:11

Depends. Is it material ?

I'm guessing no.

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By taxnovice
25th Jul 2021 18:46

@lionofludesh. Yes, it's material.

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By SXGuy
25th Jul 2021 18:51

How did you account for the extra vat payable this year?

If frs is based on percentage of turnover, then did you correct it by reducing sales? If so, why do you want to reclaim CT in a prior period but also take advantage of the reduction in CT for the current period as well?

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By taxnovice
26th Jul 2021 10:06

Apologies if I wasn't clear. This year we moved to the standard rate, but it would be the same problem if we just applied the higher correct FRS rate whilst still on the FRS scheme.

For example, in the prior year period say we had £100 of sales. FRS VAT inclusive sales are therefore £120, and if we applied the wrong rate (say illustratively 10% vs. 16.5%) then we paid 6.5% x £120 (£7.80) VAT too little. Of course this £7.80 is subject to CT @ 19% in the period, which was also paid in HMRC's favour as part of the error.

When correcting VAT, we simply made a box 1 adjustment in the current reporting period and made a balancing payment of £7.80 in addition to the correct amount of VAT due for that period, we didn't reduce sales. Nothing has yet been done to correct CT.

However using our example this means we paid £1.48 (£7.80 x 19%) corporation tax too much last year. My question is simply should we correct the prior year and resubmit last year's CT calculation, or reduce CT in the current year to claim it back?

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