Morning! I am trying to put together a set of accounts for a new client. I have very patchy information from previous accountant. The client supplies services to customers in both UK and one major customer in EU who is located in the Netherlands.
When I first starting acting for this client, I was alarmed to see they were on Flat Rate VAT scheme even though most of their turnover was to the major EU customer and no VAT charged. Researching the implications of the flat rate scheme for such a business and contacting the VAT helpline to confirm my findings reassured me however. In summary:
- Client is based in UK and supply of services is to Netherlands.
- From the Place of Supply Rules: As it is a business supply, the place of supply is deemed to be the place where the customer belongs - i.e. Netherlands
- Also from the Place of Supply Rules: "If you are in the UK and the place of supply of your service is in another EU country, the supply is outside the scope of UK VAT".
- From the FRS rules: "Don't include in your flat rate turnover "any supplies outside the scope of UK VAT"."
Seems reasonable - the supply is of services to a customer based in EU country, so is outside the scope of UK VAT, and therefore is not included in the flat rate turnover.
So the flat rate turnover effectively only includes the customer's gross sales of services to UK customers - they don't have any other income.
But now that I come to do the accounts, I am looking at the accountant's reconciliation of the closing balance for VAT on last year's accounts. They have applied the 11% flat rate percentage to all of the sales income received by the client in the VAT period (the client uses the cash based turnover method), a substantial proportion of which was sales to the major EU customer which were outside the scope of UK VAT. Surely this is wrong for two reasons?
1) They have included the turnover which is outside the scope of UK VAT in the flat rate turnover
2) They have entirely ignored any invoices raised in the VAT period but not paid before the year end, so I presume last year's turnover was overstated by 20% VAT on the UK invoices raised in the closing VAT period. Even though they're using the cash based turnover method of the FRS, surely their year end VAT creditor should include VAT on ALL outstanding invoices, not just the VAT on those invoices which have been paid, but the VAT not yet paid across to HMRC.
Or am I entirely missing something?
I have not been provided with any VAT returns from earlier periods so I cannot see how this income was treated in the VAT returns - only the year end closing VAT creditor.
Many thanks for any assistance. Apologies that this is a bit of a wordy question.
Replies (8)
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Yes - you are missing the VAT returns
... from the previous year. Without them, it is difficult for you to ask a focussed question and for anyone else to give a proper answer.
I agree that sales of services to business customers in the EU should be excluded from the turnover to which the flat rate is applied.I agree that the closing VAT creditor should include the flat rate VAT due under the accruals basis (standard VAT accounting basis) on all invoices issued, so if the client is using the cash accounting variant of the FRS, the closing VAT creditor should include the FRS VAT due on the (UK) debtors at the year-end.
If the previous accountant has not applied the above, the VAT creditor in the accounts was wrong.
However, I don't know what else you can deduce from a reconciliation of the closing VAT balance because I don't know what it is seeking to reconcile to what. If the reconciliation includes FRS VAT on the EU sales of services, it suggests that VAT was overpaid, not just on the closing creditor, but on all previous VAT returns, and that the turnover in the accounts, assuming that it was based as recommended on the turnover inclusive of standard-rated VAT (on the UK sales) less the flat rate VAT paid, was understated, along with the profits chargeable to CT. If you want to pursue this further, you need to see the VAT returns or more to the point, the workings which formed the basis of the VAT returns.
I would ...
Correct the opening VAT creditor with an adjustment to Sales.Make sure that the VAT is correct for the year you are doing and that the closing VAT creditor includes the FR VAT due on debtors.Complete this year's accounts to meet the client's deadline.Forget about re-inventing the wheel for the previous year(s).Tell the client that his previous accountant got it wrong, but you are a twinkling star who will get it right for him in future.
Sorry
Didn't read the question properly - and blurted that one out
I happened upon this question as I was trying to find if anyone knows any reason why you should use net turnover in FRS accounts for a Ltd Co?