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VAT flat rate scheme - profit made. How to show on accounts?

VAT flat rate scheme - profit made. How to...

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As above (reproduced below for conveniance)

Can anyone help? Client opted for flat rate scheme abd is circa. £200-£300 better off per quarter. How is this accounted for? How is it shown on the accounts? Am not sure and any help would be welcome.
Richard Crofts

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By martinfoley07
10th Oct 2008 17:51

Is FRS needed?
The FRS was introduced primarily with a view to save HMRC money, time and effort in VAT inspections of small businesses.

Think about the agony of going through a small unrepresented business' expenses !! All those postage stamps with VAT on them, not to mention insurance, train fares etc. And that's before you get to miscalculations and muddles. Inspections were horribly cost ineffective, yet VAT was being lost and there was the worry about not ever doing VAT visits for micro companies (pour encouragez les autres). Hence FRS. The inspection should be a doddle. (I say should. That's a story for another day).

But FRS also gives such small businesses the opportunity to keep less detailed scraps of paper and simplify calcs if they so choose, so funnily enough I think it is a rare win-win
(with added bonus for HMRC that it enables the spin doctors to say how friendly VATman is to small business)

(it so happens that most of my clients on FRS want to keep tabs on their FRS profit so - whether doing the books themselves or using bookkeepers - they tend to keep their books on a "standard" basis and take the difference between standard VAT payable and FRS payable to other income (or commit hari-kari if it's other expenses!). Which for me happens to be the most appropriate accounting treatment - but let's not go there!! I would not care which of the various methods the clients wanted to use if they had strong preferences)

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By petersaxton
10th Oct 2008 17:32

Martin makes a good point
I'm interested in what is the best accounting then. How about this logic?:
The sales have VAT added so it is sensible to have the sales excluding VAT because it's only very small businesses or start up who would be able to have the same selling prices without VAT.
I would use a similar argument with the inputs.
Therefore, there would be a profit or loss down to using the flat rate.
This should be shown in the accounts.
Unfortunately, using this logic would defeat the purpose of having a flat rate scheme. It wouldn't necessarily defeat the purpose of choosing to use the scheme though.
Working out VAT on sales isn't difficult or onerous.
Is accounting for VAT in flat rate scheme companies difficult or onerous? I don't think so.
It would appear that the flat rate scheme isn't very well thought out. Is it needed?

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By martinfoley07
10th Oct 2008 13:48

VATman's powers over accounts
I make no comments on the various options for accounts presentation if in FRS (it's been done to death on many threads).

BUT....I must comment on the idea that HMRC's preferred method is somehow the one that should be followed.

Let's be 100% clear ; VATman has NO authority or basis in law whatsoever (none, nil, zippo, zilch) to determine the accounting treatment for annual accounts, financial statments etc etc. It does not matter if their literature uses the word "may", or the word "will", or the word "must" or any other word. Nor whether they imply or express any view whatsoever on the topic.

VATman can of course tell you how they want you to compute VAT, how they want you to report VAT on returns (for example, show turnover net or gross or whatever way they darn well choose), what records they want you to keep for VAT, how you should invoice VAT etc etc.

But they have NO authority (none, nil, zippo, zilch) to determine what accounting treatment you decide to follow. I hope we can knock that chestnut down for good.

I leave discussing pros and cons of different methods to others. Some clients or accountants may well choose to follow VATman's preference(s) for any number of reasons. But I hope we can knock on the head the idea that HMRC determine the accounting treatment. Please.

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By petersaxton
09th Oct 2008 13:32

Cedella Popo
Set up a creditor at the end of the month.

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By kabini
10th Apr 2005 17:42

VAT Flat rate scheme - disclosure
VAT Notice 733 suggests the following treatment:

12.16 The Inland Revenue has confirmed that for businesses who are using the scheme, it is expected that accounts will be prepared using gross receipts less flat rate VAT percentage for turnover and that expenses will include the irrecoverable input VAT. For those businesses using the scheme for only part of a year, accounts figures for the time on the scheme should be added to those for the time not on the scheme to arrive at the total for the year.For both Customs and the Inland Revenue, there is a requirement to keep a record of sales and purchases. But, for businesses using the scheme, that record does not have to analyse gross, VAT and net separately. The records (whether normal system or flat rate scheme) need only be complete, orderly and easy to follow.

The Inland Revenue manual covering the subject is available at:
BIM31585 - VAT: flat rate scheme
The Inland Revenue Manual uses the word "probably" whereas VAT Notice 733 uses the word "will".


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By Anonymous
10th Apr 2005 09:39

Gross up sales and expenses
I've also got a client on flat-rate and having checked out the HMCE website the guidelines it gave for accounting treatment were recording all sales and expenses at gross amounts then deducting flat-rate VAT paid over to HMCE from sales only.
Will check the site again to make sure.

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By malcolmcoles
14th Aug 2008 10:00

Doesn't that count as wrong?!?
Well, it says amount excluding VAT, when they want the amount including it. That counts as wrong in my book!!! Anyway, cheers for the confirmation (and hadn't spotted date! Oops.).

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By Dave Paveley
14th Aug 2008 08:09

And the prize for the oldest thread resurrection goes to...

Gross figure does indeed go in box 6. The descriptions are not wrong per se, HMRC do not issue separate VAT returns for those using the scheme so entering the gross figure is a work around.

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By malcolmcoles
13th Aug 2008 22:50

Filling in the FRVS form
My main problem with the frvs is how to fill out the form. I know it's supposed to be easy. But am I right that the online form is incorrect, as I explain here: - it says to include the amount excluding vat at box 6 when it's the amount including it with the FRVS.

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By carnmores
10th Apr 2005 19:37

plent of previous answers on this topis
try searching at the search box on the home page as the threads are good

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By NeilW
09th Apr 2005 22:10

Treat as 'discount'
Every VAT quarter you must clear the VAT control account, which you have been faithfully stuffing with all those 17.5% chunks from the invoices.

DR the VAT control account and CR Bank and a 'VAT recovered' account in the relevant proportion.

When drawing up the P&L treat the 'VAT recovered' account in the same way as you would 'Discounts received'. That way expenses reflect the true 'Net VAT' position that you get with your particular Flat Rate percentage, and turnover isn't artificially inflated. It also works regardless of whether you log your expenses ex. or inc. VAT.

If anybody can come up with a better name for 'VAT recovered' I'd appreciate it.


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By NeilW
10th Apr 2005 11:05

Danger of overstating turnover
The problem with deducting Flat Rate VAT from sales is that it inflates turnover. In my view it shouldn't matter whether the client is VAT registered, non-registered, or which VAT scheme they are on, the turnover in the accounts should stay the same.

It would be nice to get a standard on the matter. It seems to be a common question.


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By Anonymous
10th Apr 2005 14:26

Neil, you haven't been swayed, then!
I agree with Liz's posting.

Can refer back to a piece of research I did in February in answer to a very similar question:-

According to IR manual, reference BIM31585, consider the example:
Net sales £80000
17.5% VAT £14000
Gross sales £94000
Assume flat rate VAT @ 6% = £5640

In this instance IR would expect reported turnover to be £94000 - £5640 = £88360
Expenses would be recorded gross

It would appear that an alternative is permissible ie. present turnover as £94000 and show the £5640 as an expense in P&L

I haven't seen that it is OK to present what some people (no, not me honest!) feel is the most logical ie, show turnover as £80000 and a VAT credit of £14000 - £5640 (£8360) elsewhere in the P&L.

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By AnonymousUser
10th Apr 2005 16:22

option a
to my mind option a) is the logical solution ie showing income and expenses gross and the VAT payments netted off against sales.
The alternative of showing an expense item of the VAT payments would look rather odd, as the normal expenses would be somewhat skewed.
The expenses/cost of sales etc are inflated by being shown gross, but this is offset by the increased turnover.
Whilst this treatment is obviously different to normal accounting presentation, this is a necessity as the VAT flat rate scheme is totally different to "normal" VAT and so trying to present the figures in a "normal" manner defeats the whole object of the exercise, which is to save considerable time by booking everthing gross and doing a simple calculados to work out the VAT payable.

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By abacusacc
10th Apr 2012 17:21


Thank you for all the posts, I am too now thinking how to account for the journals in Sage between the sale/purchase and the VAT. My client produces invoices which have to show VAT @ 20% for the customers, all purchase invoices are posted as net......the journals between the nominal codes balance out to zero but with FRS they do not what do you do with the difference? All help as usual very much appreciated.

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Replying to abacusacc:
By Accountant98765
26th Apr 2021 11:23

Hi, How did you get around this journal?

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Replying to Accountant98765:
By Duggimon
26th Apr 2021 11:43

Nine years and sixteen days have elapsed since the post you're replying to was posted.

The answer though was to journal the FRS scheme saving to other income with a corresponding debit to VAT liability.

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