Flat rate scheme, recording expense

[Alan]

Hi,

I use KashFlow which does all the Flat Rate calcs for me.

I currently record all expenses net value + (input)VAT in the appropriate columns and all my sales net value + (output)VAT.

Kashflow creates a balance account FRS adjustment. The way I see it that account contains the gain or loss of being in FRS scheme. i.e. output vat adjusted by what I have to pay due to FRS - input vat
and it shows a negative amount (=> the FRS is costing me )

However my accountant say thats not the way the scheme works, and I shouldn't account for input VAT at all, and that I should input all expense as the gross amount and not show VAT (would that be zero or N/A in KashFlow I'm not sure)

As I'm writing this that sort of is starting to make sense, but I'd love to hear from an accountant that uses KashFlow (mine doesn't) as to whether this is so? (and if it is so, why doesn't KashFlow poke up a big warning lik eit does on EC sales, saying oi you are in FRS don't account for input VAT )

 

[johndon68]

I don't use Kashflow but I am on the FRS and was told by my accountant to completely ignore VAT on purchases/expenses and enter everything as gross with no VAT element shown at all.

John

 

[UK Contractor Accountant]

This is what HMRC Manuals says -
BIM31585 - Value Added Tax: flat rate schemes
Computation of trading profits
The flat rate scheme removes the necessity to calculate VAT on each individual input and output for the VAT account. Instead only the flat rate VAT will need to be passed to the VAT account. Where the concession for capital assets is adopted, the VAT reclaimed will also pass through the VAT account.

Expenses will probably be shown inclusive of VAT as it is irrecoverable (similar to a business not registered for VAT), and it is likely that turnover will be shown net of the flat rate VAT payment. You may however find that the flat rate VAT payment is shown as a profit and loss expense rather than deducted from total turnover.

Where there is irrecoverable VAT on capital items it will form part of the cost of the asset on the balance sheet and of the cost for capital allowances purposes.

This is what VAT Notice 733 says-

7.8 How do I prepare business accounts for income tax purposes while I am using the flat rate scheme?
It is expected that accounts for businesses who are using the scheme will be prepared using gross receipts, less the flat rate VAT percentage, for turnover and that expenses will include the irrecoverable input VAT.

For both VAT and income tax purposes, 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 need only be complete, orderly and easy to follow.

 

[Nacha]

I'm also using KashFlow and on the Flat Rate Scheme and just like you I record all the VAT elements of all purchases and sales, in my eyes that's the proper way to do things the minute the HMRC assigns you a VAT number.

The HMRC says that basically 'you don't need to record the VAT on your purchases' but it's not forbidden by any means, it's just a case of; if you want less data entry tasks, then don't bother recording the VAT element of your purchases, as that's one of the benefits of being on FRS.

I was questioning this with KashFlow a few days ago but so far no real advice on it from them.

The way I see it, KashFlow seems to be built mainly to deal with those on the 'standard VAT scheme' who would of course enter all the VAT elements of purchases and sales just as both yourself and I have been doing. The advantage for you and I (as you pointed out) is that because we enter everything 'properly' in terms of the VAT elements we can simply look at the Journal in which KashFlow creates when we submit a VAT return and easily see if we are better or worse off being on FRS, good luck to anyone who chooses not to record the VAT on their purchases, being able to make such an analysis in as accurate of a manner.

In terms of if you want to start entering your purchases without separating the VAT element, I would assume you would use N/A, as using 0% would assume that the purchase was analysed for VAT and the VAT element was zero-rated, which would sort of seem strange. Then again... does N/A = exempt? who knows, that's always made little sense to me.

Maybe there's a setting to turn off altogether the 'VAT rate drop-down selector' when entering purchases, that's a question which could be worth asking to KashFlow support. I try to ask them such questions and they tell me to ask my accountant, like my accountant designed and built KashFlow!?!

 

[UK Contractor Accountant]

You can do either is the inference from the above.

 

[TheCyclingProgrammer]

You are certainly correct to keep an eye on your FRS surplus to see if it exceeds the input VAT you have paid over the year because if it doesn't, the FRS is costing you money.

You don't account for input VAT in your VAT calculations (with some exceptions) but you do have to account for it when calculating both your company's profit and the profitability of the FRS (or loss) as you described.

I use FreeAgent and enter all expenses with the correct VAT amounts and also the place of supply as there are still times when input VAT is a factor on the FRS. If you're making a capital purchase over £2k then the VAT should be reclaimed. If you are buying a service from an overseas supplier then you need to account for the supply using the reverse charge, which is outside the scope of the FRS and the reverse charged VAT needs to be entered in to your VAT return as both input and output VAT.

 

[Alan]

you do have to account for it when calculating both your company's profit and the profitability of the FRS (or loss) as you described.

If one enters it as gross expense then it isn't really possible (within the accounting system) to see a 'loss' or 'profit' on the FRS as one side of the equation is missing.

Expenses will probably be shown inclusive of VAT as it is irrecoverable (similar to a business not registered for VAT), and it is likely that turnover will be shown net of the flat rate VAT payment.
.....
It is expected that accounts for businesses who are using the scheme will be prepared using gross receipts, less the flat rate VAT percentage,

Which to me, says they want you to use gross numbers not net numbers. The logic of that is either
1. in theory the effort of calculating is less, but for anyone using an accounting system rather than a manual ledger it really is no difference
2. (the cynic in me says) they don't want you to know how much the FRS is costing you, or you might leave and it will cost them money, both the loss of overpaid VAT and the extra effort they will have to go through when they inspect your books.

Anyway I'll be out of the FRS next quarter, I don't want to over pay the VAT man

 

[UK Contractor Accountant]

Just to add hmrc have no basis in law on how your accounts are prepared.

Accounts should generally be prepared in accordance with UK GAAP whatever that may be!

 

[TheCyclingProgrammer]

If you add the expenses with the correct VAT, to get the FRS profitability calculation, does Kashflow then do the right thing with respect to your VAT returns and CT calculations, i.e. normal input VAT is not included on the VAT return and gross amounts are used when calculating taxable profit?

If so, then I don't see any issue with continuing as you have been but obviously if it's not doing things correctly you'll need to start entering things as gross expenses.

 

[David Griffiths]

How things are recorded is up to each individual. However, saving money is not the only reason for the FRS's existence. Indeed HMRC's rationale behind the scheme was to simplify adminstration and they set the flat rate percentage for various sectors to be broadly neutral in terms of tax.

If you adopt the FRS for the simple admin, I don't know why you'd want to up the complexity of the admin by separating out VAT on all of your expenses. On the other hand if your motivation is the saving, then perhaps you need to see exactly how many pennies that you've save, so would separate out the VAT to find out.

Most of the FRS clients that we have are set up not to record any VAT at all, and we simply apply the flat rate percent to the quarter's turnover. You can still do a broad check on whether it's financially worthwhile from the gross figures entered. We have a couple of clients who probably lose out by a small amount, but they don't mind few pounds extra VAT when set against the time that they used to spend accounting for VAT.