Not necessarily disagreeing with you, Lion, but your points do raise a few issues / quibbles / discussion topics / whatever:
You say the accounts can be drawn up VAT inclusive or exclusive. That would be in contravention of SSAP 5 (had to google for the number!) although I have no idea if the modern equivalent has anything to say on the subject. Not exactly a deal-breaker, I agree, but still...
You also say that the profit will be the same either way. That would only be the case if the VAT balance is accrued for. When I worked for a small rural practice about a million years ago who liked to cut the odd corner, there was definitely no VAT accruing going on and, in practical terms, I highly doubt there is much going on now for smaller practices banging out statements of earnings for clients who are VAT registered.
Also, and apologies if I’m reading you wrongly, you seem to be answering a slightly different question to everyone else who are contrasting net accounts where the VAT is addressed as it normally would be vs gross accounts where VAT is completely ignored because the trader happens not to be VAT registered yet.
Interesting, thanks. If I’ve ever read that, it’s flown out of mind. But then I don’t think the Revenue have any business issuing accounting guidance. Although I can see the sense of the distinction they’re advising if you really must use the cash basis.
You and Truthsayer are both right IMO but that’s spoiling the fun of a relatively unusual and interesting “what would you do and why” discussion on gross vs net accounts :)
Yes. Source: HMRC (which I appreciate isn't necessarily the law but probably is in this case, he says as can't be bothered to hit the references).
Obviously, I appreciate there are all sorts of riders and complications but, for the sake of my comparison, I'm assuming a straightforward, plain vanilla case.
Might be one where some CCAB guidance would be good because it's potentially a damned if you / damned if you don't situation.
Do you prepare net and put the dodgy client on all fours with a compliant one? Risk is the VAT is never declared and dodgy bloke walks off with ill gotten gains but at least the right direct tax has been declared.
Or do you prepare gross because that is what dodgy has had? Risk is that accounts are definitively wrong because you're including VAT within sales when VAT can never be part of sales. There's also the risk that other people like mortgage providers could claim the profit has been overstated. But, on the other hand, at least you're stiffing dodgy for a bit more direct tax than he should be paying.
Hmmm, think I would go the other way to the previous post and prepare net accounts. That is, after all, what *should* have happened, puts you on all fours with the *correct* position and involves less unravelling down the line.
I think it’s important that the client knows he owes £x in VAT and I think I would be disclosing that on the face of the B/S as a creditor in its own right so it’s out there for the client, his dog and anyone else looking.
Perhaps you need to have The Chat before you get into preparing accounts, though?
As a fairly keen amateur historian, I’ve stumbled across many references to this over the years and it is always portrayed as A Very Bad Thing.
Given how far in the mire HMRC have sunk and how much tax is left uncollected, I do seriously wonder if there might be a role for tax farming. Maybe not in terms of assessment but certainly in terms of the collection. It could even work in accountants’ and taxpayers’ favour by forcing HMRC to process more quickly so that the tax farmers would know how much to collect!
Not always "a few large and highly-unionised companies," however.
When RTI was coming in, I told my last remaining weekly payroll a haulage company, about 20 'ees) that I was no longer able to support that and suggested they move to monthly. Completely out of left field, they came back and said their staff had voted for four weekly pay. I could never get my head around why you'd want pay at progressively earlier parts of the month which were progressively further and further away from the point where most of your DDs were likely to hit.
It was also a pain in the backside for us: I missed a trick in just saying 'no' at the very beginning. Unsurprisingly, when the owners sold up a few years later, the new owner (who was taking the payroll in house) told me they WERE going to monthly, no ifs / no buts.
My answers
Not necessarily disagreeing with you, Lion, but your points do raise a few issues / quibbles / discussion topics / whatever:
You say the accounts can be drawn up VAT inclusive or exclusive. That would be in contravention of SSAP 5 (had to google for the number!) although I have no idea if the modern equivalent has anything to say on the subject. Not exactly a deal-breaker, I agree, but still...
You also say that the profit will be the same either way. That would only be the case if the VAT balance is accrued for. When I worked for a small rural practice about a million years ago who liked to cut the odd corner, there was definitely no VAT accruing going on and, in practical terms, I highly doubt there is much going on now for smaller practices banging out statements of earnings for clients who are VAT registered.
Also, and apologies if I’m reading you wrongly, you seem to be answering a slightly different question to everyone else who are contrasting net accounts where the VAT is addressed as it normally would be vs gross accounts where VAT is completely ignored because the trader happens not to be VAT registered yet.
Interesting, thanks. If I’ve ever read that, it’s flown out of mind. But then I don’t think the Revenue have any business issuing accounting guidance. Although I can see the sense of the distinction they’re advising if you really must use the cash basis.
You and Truthsayer are both right IMO but that’s spoiling the fun of a relatively unusual and interesting “what would you do and why” discussion on gross vs net accounts :)
Well, I would prepare on a net basis: see my first post @ 8:11.
Yes. Source: HMRC (which I appreciate isn't necessarily the law but probably is in this case, he says as can't be bothered to hit the references).
Obviously, I appreciate there are all sorts of riders and complications but, for the sake of my comparison, I'm assuming a straightforward, plain vanilla case.
Interesting divergence of views on this one.
Might be one where some CCAB guidance would be good because it's potentially a damned if you / damned if you don't situation.
Do you prepare net and put the dodgy client on all fours with a compliant one? Risk is the VAT is never declared and dodgy bloke walks off with ill gotten gains but at least the right direct tax has been declared.
Or do you prepare gross because that is what dodgy has had? Risk is that accounts are definitively wrong because you're including VAT within sales when VAT can never be part of sales. There's also the risk that other people like mortgage providers could claim the profit has been overstated. But, on the other hand, at least you're stiffing dodgy for a bit more direct tax than he should be paying.
Hmmm, think I would go the other way to the previous post and prepare net accounts. That is, after all, what *should* have happened, puts you on all fours with the *correct* position and involves less unravelling down the line.
I think it’s important that the client knows he owes £x in VAT and I think I would be disclosing that on the face of the B/S as a creditor in its own right so it’s out there for the client, his dog and anyone else looking.
Perhaps you need to have The Chat before you get into preparing accounts, though?
+1
As a fairly keen amateur historian, I’ve stumbled across many references to this over the years and it is always portrayed as A Very Bad Thing.
Given how far in the mire HMRC have sunk and how much tax is left uncollected, I do seriously wonder if there might be a role for tax farming. Maybe not in terms of assessment but certainly in terms of the collection. It could even work in accountants’ and taxpayers’ favour by forcing HMRC to process more quickly so that the tax farmers would know how much to collect!
Anyway, moving onto my next fantasy....
Indeed. I have a very similar teacher story and with the same vintage too, coincidentally.
Pupil: “Can I open the window, please, sir?” (It was summer and absolutely baking)
Teacher: “Yes, Bloggs.”
Pupil moves from desk to open window
Teacher: “I didn’t say that you may open the window. That’s a detention you owe me.”
Pupil left absolutely baffled and not sure he grasped the distinction even when explained to him. But at least he wasn’t made to serve a detention.
Not always "a few large and highly-unionised companies," however.
When RTI was coming in, I told my last remaining weekly payroll a haulage company, about 20 'ees) that I was no longer able to support that and suggested they move to monthly. Completely out of left field, they came back and said their staff had voted for four weekly pay. I could never get my head around why you'd want pay at progressively earlier parts of the month which were progressively further and further away from the point where most of your DDs were likely to hit.
It was also a pain in the backside for us: I missed a trick in just saying 'no' at the very beginning. Unsurprisingly, when the owners sold up a few years later, the new owner (who was taking the payroll in house) told me they WERE going to monthly, no ifs / no buts.