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Flat rate vat

Flat rate vat

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I know flat rate scheme is supposed to ease off the bookkeeping side for accounts hence only revenue is posted net off vat whereas the expenses are grosed. For corporation tax purposes, do we still leave the expenses grossed up or net? Wont it inflate in the expenses if grossed up amounts are used?

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Euan's picture
By Euan MacLennan
19th Apr 2014 15:29

Revenue is posted gross of VAT

... as are expenses.  You then post the VAT actually paid as a set-off against gross sales or as a separate expense.

Or, if you don't mind the book-keeping, post sales and expenses net of VAT with the VAT being posted to a VAT control account and then, writing off the difference between the VAT balance and the FRS payment (hopefully) as income - or you should not be in FRS.

Either way, the "profit" from using the FRS compared with standard VAT accounting is taxable as income.

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By lionofludesch
20th Apr 2014 09:21


Some of my clients like to keep a record of the VAT so that they know whether flat rate is working for them.

If they don't, you have to work on gross for the expenses - it'd be too costly to do otherwise.

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Replying to Fairymonster:
By gutsychyk
21st Apr 2014 11:52

so for corporation tax purposes as well? wont it inflate the allowable expenses?

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Replying to Tim Vane:
By lisler
21st Apr 2014 21:18

can you substantiate your assertion

fawltybasil2575 wrote:

 may I advise that the accounting rules for limited companies are unequivocal in relation to the entries to be shown in Statutory Accounts ( the rules for unincorporated businesses allow more flexibility but for simplicity I shall explain the position for companies as your client is a company).

(1) Income must be shown inclusive of VAT (subject to the important "caveat" below).

(2) Expenses must be shown inclusive of VAT (no caveat)


Please forgive my ignorance, where exactly in the Companies Act or the Regulations issued by the Secretary of State does it say that income (by which I take it you mean turnover) should be shown inclusive of VAT?

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By lisler
22nd Apr 2014 11:05

My interpretation is opposite to yours

and I would not assert that the accounting rules for limited companies are unequivocal in relation to the entries to be shown in Statutory Accounts in respect of the Flat Rate VAT Scheme.

Extract from SSAP 5:

"As a general principle, therefore, the treatment of VAT in the accounts of a trader should reflect his role as a collector of the tax and VAT should not be included in income or in expenditure whether of a capital or revenue nature. There will, however, be circumstances in which a trader will bear the VAT, and in such cases where the VAT is irrecoverable, it should be included in the cost of the items reported in the financial statements."

My interpretation of "where the VAT is irrecoverable" is if the reporting entity cannot recover the VAT. Not as it appears in your interpretation where the VAT is not payable to HMRC.

FRSSE 2008 reflects the same principle:

"Turnover shown in the Profit and Loss account shall exclude either VAT on taxable outputs or VAT imputed under the Flat Rate VAT Scheme. Irrecoverable VAT allocable to fixed assets and to other items disclosed separately in the financial statements shall be included in their cost where practicable and material." 

I treat it as Euan MacLellan suggests in the second paragraph of his reply. This gives a turnover figure for a business operating the Flat Rate VAT Scheme (FRS) directly comparable with other businesses not operating the FRS with another entry showing the additional income (or cost if the FRS scheme is unsuitable) attributable to using the FRS. 

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By lionofludesch
22nd Apr 2014 11:26


As a principle, I don't like the idea of turnover being stated VAT inclusive.

Just doesn't seem right.

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By pstoneman
19th Aug 2015 11:52

Flat Rate Scheme

I know these matters have some age but I can see the merit in either method discussed. Whether it is correct, I prefer to post all items as under normal Vat rules and at each Vat Quarter (assuming there is a "gain") debit Vat Account, credit sales/income account.

This also for Management Accounting would retain comparability, if, say, the company could no longer use the FRS method.

To add to the confusiion, I inherited a situation where it appears both methods have been used in the same year.

I have a new client on the FRS and have received transaction details and draft accounts. Generally expense items have been shown as including Vat. The exception is that £6000 was spent on a Fixed Asset and the Vat was claimed separately on them (as is allowed under FRS). These items are shown as £5000 in the FA Account.  Andditional Fixed Assets, very same nature as above, but only cost £1500.  These are shown as £1,500 in the FA Account. 

Is this still correct ? Does not feel it






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