Anonymous
Share this content
33

VAT presented in P & L - why?

Client is insistent on VAT shown as an expense in P&L as previous accountant did.

Didn't find your answer?

This is alien to me as VAT has always been a balance sheet item. Client is one man LtdCo on normal (non-FRS) How should the VAT on sales be reflected in the P&L to keep my client happy? Grateful for any clarity.

Replies (33)

Please login or register to join the discussion.

avatar
By WhichTyler
13th May 2018 15:37

Do a separate set of management accounts or cash flow report that clarifies it but isn't part of the Co House accounts?

Thanks (1)
Replying to WhichTyler:
avatar
By GDJMAAT
13th May 2018 15:59

Thanks for that but it's far too onerous for an FRS 105 micro-entity.

Thanks (0)
Replying to GDJMAAT:
avatar
By WhichTyler
13th May 2018 17:03

Add an extra note to the accounts then? (Gross Sales- output VAT = Turnover per p&L)

Thanks (0)
avatar
By andy.partridge
13th May 2018 16:57

Turnover will be net of VAT. Doing things right should keep the client happy, not doing them wrong just because that’s how it’s always been.

Thanks (6)
JCACE
By jcace
13th May 2018 21:10

Companies Act 2006 s 474:
“turnover”, in relation to a company, means the amounts derived from the provision of goods and services, after deduction of—
(a)trade discounts,
(b)value added tax, and
(c)any other taxes based on the amounts so derived;

Thanks (1)
ALISK
By atleastisoundknowledgable...
14th May 2018 08:25

Does he want to see all the figures gross, or an expense line showing how much vat he’s paid?
If the latter, do an Excel that copies the P&L and add a line showing the 4 vat payments.
If the former, say it’ll cost an extra 75% as you’ll have to redo all the workings.

Thanks (1)
avatar
By Pygmy
14th May 2018 10:08

I note you say he is on NORMAL VAT but is your client a second hand car dealer?

Thanks (0)
avatar
By Agutter Accounts
16th May 2018 10:09

I always tell a client when there has been a technical accounting error I have had to correct, and why.

If you don't present accounts according to accepted Accounting Standards, you open yourself to all sorts of problems at a later date.

Thanks (1)
avatar
By Steven Dring
16th May 2018 10:10

.... No idea. Sorry

Thanks (0)
avatar
By nkwayne
16th May 2018 10:11

The only way the double entry on that would work would be to show everything gross and then the net cost of vat (output tax - input tax) as a p&l line debit (assuming its a charge not a credit).

But that flies in the face of all the rules, especially for turnover as noted by jcace.

So I guess the correct reply to you is that your job is to educate your client that the previous accountant was wrong. The vat your client receives is not his money, its not his turnover, he has collected it for the govt, which is why its a creditor on the balance sheet.

Good luck!

Thanks (3)
blue sheep
By NH
16th May 2018 10:29

He probably used to be on FRS until the rules changed and that's why the previous guy did it that way

Thanks (2)
avatar
By johnfrancis
16th May 2018 10:51

This is probably a small client, who is probably more trouble than the fee income justifies. Can you suggest some other lucky accountant?

Thanks (1)
Replying to johnfrancis:
ALISK
By atleastisoundknowledgable...
18th May 2018 09:51

Quote:

This is probably a small client, who is probably more trouble than the fee income justifies. Can you suggest some other lucky accountant?

Seems a little pre-emptive.

Thanks (0)
Mike Cooper HJS
By mike_uk_1983
16th May 2018 11:09

I have seen accounts before where the the administration costs are all posted gross and then there is a line in the administration heading is called VAT on Admin costs. This tended to be where the VAT returns were done based on invoices sent through and accounts more on a payments basis and adjusted through creditors. It just proved hard to then split the VAT into the correct headings.

Overall the total of admin expenses on the P&L was correct just the split in detailed management pages was slightly funny. Sales would remain net of VAT as this is easy to resolve.

Thanks (0)
avatar
By Wanderer
16th May 2018 11:23

Reminds me of an audit in the 1980s.

Manual analysed cash book. When paying the VAT each quarter they included it in the VAT column with the result that whatever they paid across to C&E each quarter they just claimed it back in the next return.

Genius!

Thanks (2)
Replying to Wanderer:
avatar
By nkwayne
16th May 2018 12:13

Brilliant!

Shall be using that myself in future and recommending to all my clients!!

Thanks (1)
Replying to Wanderer:
Morph
By kevinringer
17th May 2018 13:43

We've got a client using SageOne who is doing something similar: Sage defaults the VAT payment to T1 and reclaim the VAT element. Sage also defaults business rates and insurance to T1. Client is very happy his VAT bill has reduced. Roll on MTD.

Thanks (2)
By Charlie Carne
16th May 2018 12:28

Is this the same company whose previous accountant apparently "deducted 10% tax credit and paid a net dividend" (see https://www.accountingweb.co.uk/any-answers/dividend-declared-payable-31...)? Are you, perhaps, the client and not the new accountant? If so, might I suggest that you focus on running your business and that you hire a qualified professional to handle the accounting and tax matters?

Thanks (1)
avatar
By Huw Williams
16th May 2018 12:40

If client insists you could show turnover gross, VAT as a deduction and "net turnover per statutory accounts" in your detailed P&L. You don't even need to have exactly the right figures as long as the net turnover is correct.

If he wants to see VAT on expenses, it is more of a pain, but you could just put it in as an extra (2) lines - "VAT on costs" and "VAT on costs recovered in VAT returns" - the same number in each line so your detailed P&L still agrees to the records

Thanks (0)
7om
By Tom 7000
16th May 2018 14:11

Do them like this:
Turnover gross 500,000
Costs Gross 100,000
Wages Net 100,000
Profits 300,000
What I pay Govt:
Vat 80,000
PAYE 80,000
Business rates 5,000
Company tax 27,000
Income tax on divs 22,000

Whats left for me 86,000

and kiddies that's why the companies act doesn't allow you to present accounts like that with vat gross or employee taxes split out as you only get 86/300 and taxes are 72%

Makes you think....

Thanks (1)
Replying to Tom 7000:
avatar
By WhichTyler
16th May 2018 17:31

Especially if you get the VAT fraction wrong... :-)

Thanks (0)
avatar
By C.Y.Nical
16th May 2018 18:59

I have always thought the rule that VAT is omitted from the turnover figure is a fraud by the government abetted by the accountancy profession. A small business with a few hundred thousands of turnover usually works hard to earn every pound, and as far as its customers are concerned every pound they pay is for the goods or services provided. But the hard-won takings of the business are artificially depressed by the omission of VAT from the top line. I have a friend who has worked hard to build his business up to take £250k p.a. last year - but in fact he has managed to take well over £300k - his accounts don't reflect that.

Thanks (0)
Replying to C.Y.Nical:
blue sheep
By NH
16th May 2018 20:36

May I politely suggest that you obviously do not understand the principles of how vat and accountancy works

Thanks (0)
Replying to C.Y.Nical:
avatar
By andy.partridge
16th May 2018 22:29

Gosh, I wanted to reply in detail to this, then quickly realised I’d be wasting my time.

Thanks (1)
Replying to andy.partridge:
By Charlie Carne
17th May 2018 12:23

Yeah, but we'd enjoy reading it!

Thanks (1)
Replying to andy.partridge:
By Charlie Carne
17th May 2018 12:24

Duplicated

Thanks (0)
Replying to C.Y.Nical:
avatar
By C.Y.Nical
17th May 2018 23:48

I think I do understand how VAT works, and the point I was trying to make is that from the point of view of a small business when a sale is made to a final consumer (who cannot recover VAT as input tax) both the supplier and the customer perceive the transaction as being valued at the price paid. If a VAT registered seller of ice cream sells an ice cream for £2, they have earned £2 and their customer has paid £2. The customer doesn't think that s/he has paid ~£1.67 for the ice cream and 33p in tax, and although the seller is aware at some level that 33p from the sale belongs to the government their gross takings were £2. When they go home at the end of a day after selling 1,000 ice creams (the sun was shining) and their partner asks how much they've taken they don't answer £1,670 plus VAT, they say £2,000. But the accounts don't show sales of £2,000, they only show £1,670, and I don't think that's right.
But that's just me I suppose and I've long ago stopped expecting my view of the world to bear much resemblance to the view presented by accounts.

Thanks (1)
Replying to C.Y.Nical:
ALISK
By atleastisoundknowledgable...
18th May 2018 08:36

£1,666.67, so an extra 0.017% lower.

Thanks (0)
Replying to C.Y.Nical:
avatar
By Cheesy-peas
18th May 2018 09:23

I have a friend who is paid by PAYE. When he looks at his payslip he doesn't actually receive his gross pay, somehow the gov have helped themselves to some of it, what a con!

Thanks (0)
Replying to Cheesy-peas:
avatar
By C.Y.Nical
22nd May 2018 08:56

Quote:

I have a friend who is paid by PAYE. When he looks at his payslip he doesn't actually receive his gross pay, somehow the gov have helped themselves to some of it, what a con!


A PAYE payslip shows gross pay, deductions, and net pay.
The fact that payslips are produced in this way supports my argument! The gross pay is equivalent to the gross receipts of my hypothetical ice cream seller, and they are accounted for, not hidden.
I am not impressed by the criticisms of my post. There isn't a single reasoned response which makes any sense. Some of the responses are really quite impolite and therefore, in my view, unprofessional.
Thanks (0)
Replying to C.Y.Nical:
blue sheep
By NH
22nd May 2018 09:14

You seem to be missing the one fundamental point about VAT (and PAYE), and it is a common mistake clients often make. As a VAT registered trader you are merely collecting VAT on behalf of HMRC, that VAT does not belong to you and that is why it is not taken into your P&L.
The same is true of PAYE, you are merely holding that on behalf of HMRC.

Thanks (0)
Replying to NH:
avatar
By C.Y.Nical
25th May 2018 12:31

Thanks for a more considered reply than some of the others.
I understand the fundamental point you refer to but it's a legal artefact, not a true and fair view of trading. As you say, the output VAT is not the trader's property, and therefore cannot be included in the trader's accounts. But the reason is that the law says it must be so. And that's the only reason. If the law did not say that then it would be possible to include the sales as a gross figure and account for the net VAT payable to HMRC as a cost to the business. My point is that my ice cream seller, when asked what their takings were on the nice sunny day, will always say £2,000 because in their mind that's what went into the till. And pretty much everyone who isn't an accountant will say the same.
One of the businesses of which I remain a director was established in 1851 and we still have copies of the old accounts, printed by letterpress on large sheets so that the balance sheet could be presented with assets and liabilities in two columns side-by-side. We had a discussion at a board meeting a few years ago when one of the FRSs compelled us to change the presentation of dividends and the consensus was that the nineteenth century accounts were better in some ways than the modern ones. I said to our FD that I hoped that our modern accounts still fulfil the function of presenting a true and fair view of the business and all I got in response was a hollow laugh and a reminder that our shareholders receive a set of management accounts along with the statutory accounts so they can see what actually happened.

Thanks (0)
Replying to C.Y.Nical:
Stepurhan
By stepurhan
25th May 2018 12:46

Quote:
But the reason is that the law says it must be so. And that's the only reason.

This is possibly the most ridiculous statement I have ever seen. Congratulations.

You only have to pay tax at all because the law says it is so. Are you going to stop paying tax entirely because that is the only reason?

Thanks (0)
Share this content

Related posts