Ill be doing the bookkeeping for a sole trader whos registered for VAT and signed up for Flat Rate VAT. Im a bit hazy on the issues of Turnover and Profit for income tax and would like some advice please.
As I understand it (and using simple numbers):
Under normal VAT rules if sales are £1800 (£1500 + £300 VAT) and expenses are £600 (£500 + £100 VAT) then Turnover = £1500 i.e.before VAT, and Profit = £1000 (i.e. turnover less expenses both before VAT). The VAT bill would be £200 (i.e.£300 less £100)
However under the FRS, sales would still be £1800 and expenses £600 but the VAT payable (at FRS rate 12%) would be £216 (£1800 x 12%); Turnover = £1584 (£1800 less £216) and Profit = £984 (£1584 less £600).
So is my understanding of Turnover correct in the above 2 cases ?
Now turning to calculating the sole traders Profit for income tax (forget NI for the moment) and if all the expenses in this example are allowable then under normal VAT rules his taxable profit would be £1000 (i.e. all VAT exclusive). However under FRS would his taxable Profit be £984 (part VAT inclusive) Im confused.
What should be the Profit for income tax under FRS ?
Thanks for reading this sorry its been a bit long-winded but I understand (?) better with numbers as examples.
However what have to remember is that although they are paying less income tax under FRS basis (£3.20 assuming IT rate of 20% (£16 x 20%)). They are overall £13.80 worse off from a cash viewpoint under FRS as they are having to pay £16 more VAT but saving £3.20 IT.
HMRC's Self-employment (full) notes for 12-13 (SEFN 5) state:
Value Added Tax (VAT)
If you are registered for VAT you may enter details of your business income and expenses either:
excluding VAT (that is, with the VAT taken off), or
including VAT.
The same guidance goes on to say (square brackets added in by me):
VAT Flat Rate Schemes
If you are registered for the VAT Agricultural Flat Rate Scheme [or any other VAT FRS] include any flat rate additions charged to your customers in your sales figures. If you decide to record your figures:
excluding VAT, include
-- in box 15 any balance on your VAT account that is not to be paid over to us (this is the amount of VAT on your income that exceeds the VAT paid on your expenses, plus the payment under the Flat Rate Scheme)
-- in box 29 any balance on your VAT account that you cannot recover from us
including VAT, include the net payment to us under the Flat Rate Scheme as an expense in box 29.
Mark's reply covers where the business income and expenses are entered "including VAT" - except that Turnover (Box 14) would be £1,800; Expenses (Boxes 16 - 28) would be £600; and, Other business expenses (Box 29) would be £216 (as per the last bullet point above). Net Profit £984.
However, if you exclude VAT from the income and expenditure figures on your tax return, then: Turnover (Box 14) would be £1,500; Expenses (Boxes 16 - 28) would be £500; and, Other business expenses (Box 29) would be £16 (£100 + £216 - £300) - the amount written off from the VAT accounts as irrecoverable at the year end. Net profit £984.
Either treatment is acceptable.
Hope this helps.
-- Edited by bro0010 on Monday 2nd of September 2013 01:23:27 PM
