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FRS Profit, is it finance income and thus not possible to offset trading losses?

FRS Profit, is it finance income and thus not...

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I'm preparing my very straightforward ltd co. accounts but now have the FRS scheme to incorporate.

Is any profit treated as finance income?

I'm calculating profit as VAT Charged - FRS VAT paid - VAT expenses incurred.

Does the profit arise each month or at the end of a VAT quarterly return?

Thanks

Will Hopkins

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Euan's picture
By Euan MacLennan
18th Apr 2011 14:58

There is no such thing

... as an FRS profit.  You are merely using a scheme which enables you to pay less VAT.

Your turnover is comprised of your sales inclusive of standard-rated (20%) VAT less the VAT payable under FRS at x% of those gross sales inclusive of VAT.  From that, you deduct all your trading expenses, inclusive of VAT where applicable, to arrive at your net trading profit/loss.  This applies whether you are calculating your profit monthly, quarterly or annually.

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By whopkinscom
18th Apr 2011 15:08

Ouch?

Then surely that means I have to trawl through all my expenses and NOT split off the VAT for the duration of being in the FRS scheme and account for my turnover differently if I am in or out of FRS (i.e. with or without VAT)?

And this is supposed to make life simpler?

I suppose on the positive side that means that it is, as you imply, not finance income and thus offsettable though.

But, then again I'm sure I read somewhere (on here I think) that HMRC do not set the agenda for how final accounts are set out/made up and so as long as I'm aware that it is not treated as a "finance income" then I can probably leave things as they are.

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Euan's picture
By Euan MacLennan
18th Apr 2011 17:12

The simpler life

... is supposed to be NOT splitting out the VAT in the first place.

 

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By PennyC
19th Apr 2011 10:00

Simpler?

Euan is right - in an ideal world everyone would be better off under FRS, with no need to worry about recording VAT separately. However, my advice to clients - especially those using accounting software - is to continue to show the net figures. That will lead to a difference on the VAT account, so that one can readily see whether FRS is beneficial or not. If you account solely on a gross basis, you will never know whether you continue to be better off under FRS.

The difference is simply treated as (hopefully) a credit to the P&L account, as part of trading income.

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By whopkinscom
19th Apr 2011 10:37

Yes indeed I wanted to keep an eye on that

 And so, the essential answer is "No, it is not finance income, it is trading income". Thank you Penny.

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By martin.curtis
19th Apr 2011 15:15

It is 'input vat' not additional income

 I think it complicates matters to think of the FRS adjustment as either trading or financial income. It is neither.

The FRS scheme is just a shorthand way of calculating input vat. Under the original scheme you would take the output vat due for a period and deduct from the figure input vat claimable, the net result is the amount due to C&Ex.

You can look upon the FRS as effectively deducting a calculated amount of input vat rather than the actual amount paid out.

If the FRS adjustment is effectively input vat then by rights it should be deducted from expenses when preparing accounts. Howvere as it would be onerous to apportion the FRS adjustment against the expenses the work around is to add this amount to the sales/work done figure - thereby arriving at the same profit figure. Of course this only works if the GROSS expenses (including vat) are claimed in the accounts.

Penny - I would suggest that all purchases should be recorded gross, even where a client has a bookkeeping package. As the expenses need to be shown as gross in the accounts this means that where input vat has been deducted then it needs to be added back again. In my experience when input vat is deducted during the bookkeeping, all of the main accounting pacckages will show the total input vat deducted but not a breakdown of which expenses were reduced. At best this leads to unneccessary work trying to gross up the expenses, at worst an estimated re-apportionment of the FRS adjustment 

I understand your arguement that recording the expenses net makes it easier to see whether using the FRS scheme is beneficial but a quick tot of the vatable expenses will enable you to make a reasonably accurate estimate of the input vat available

Of course, no one way is right or wrong

Regards

Martin

 

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By PennyC
19th Apr 2011 16:41

Sorry, Martin

But your suggestion makes no sense at all. There are as far as I am aware only 2 generally accepted methods of preparing accounts where the FRS is being used:

1.     Record all income and expenses gross, and charge the VAT payments to the P&L as an expense

2.     Record all income and expenditure as net, and post the resultant difference on the VAT control account to the P&L as either income (hopefully) or as an expense

1. is undoubtedly less complicated but otherwise I see nothing wrong whatsover with the second approach. It is true that in many cases it is fairly obvious whether or not FRS is beneficial, but in my experience that is certainly not always the case - as profit margins get squeezed, the benefit can be eliminated. And, when one thinks about it, it really shouldn't be obvious (in theory). The FRS rates are designed so that, on average, no-one is better or worse off under the scheme, so in theory the FRS adjustment under option 2 should be close to zero - indeed I have a number of clients that are only marginally better off under the scheme, so I will continue to advise them to account on the net basis.

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By martin.curtis
20th Apr 2011 11:30

Different methods

Hi Penny

I didn't make myself clear enough. BIM 31585 suggests recording the expenses as gross and to make the adjustment via sales. This is a simple method and works for me.

My experience of clients with sufficiently low turnover to be able to join the FRS is that they are not very good bookkeepers; they do not have the time, knowledge and sometimes inclination to do it - I appreciate that this is a generalisation and there are exceptions. The fewer entries the clients have to make, the less time they have to spend bookkeeping and importantly the less opportunity for mistakes. One of the benefits of FRS is that it enables clients to record all expenses as gross. From their point of view and mine this is good news

I was interested in your mail and the methods you describe, both of which lead to the same result

Gross sales 240, Net sales 200, FRS paid 28, FRS retained 12, Gross exps 60, Net exps 50

My method would be 200 + 12 – 60 = 152

Under method 1 the profit would be 240 - 60 - 28 = 152

Under method 2 the profit would be 200 +2 – 50  = 152 

Regards

Martin

 

Martin

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