I've just taken on my first flat rate VAT customer. I use QuickBooks and have just set up a company file with 8.5% as the flat rate amount. I've called QuickBooks this morning to try and understand how it works but I'm not sure they really understood it either.
I'm fine with the sales. I can see the VAT report shows the 8.5%. When the VAT return is filed it then adds the VAT benefit to the P&L. So that's fine.
But with purchases I'm not so sure I understand what it should be showing and I'm hoping someone can help me. QuickBooks say I should still us the S VAT code for purchases. That would mean that a bill of £120 for example will show up on the P&L as £100 and therefore £100 will be deducted from the P&L. Is that correct? Or should the full £120 be there? I understand they can't claim the VAT back on the VAT return but should the net or gross value be on the P&L? If it's the gross then what VAT code does anyone else use? Z or N?
If I put the S VAT code in (ie standard rate) nothing happens when I file the VAT and the amount stays as £100 on the P&L. If I put Z, E, N or O it lists the expense as £120 and the full amount appears on the P&L.
I've googled it and Sage users appear to use T9 which if I'm right means that the full £120 would appear on the P&L.
So my question really is can clients claim the full £120 as an expense or is it just the £100 net amount.
Hi Princess, I tend to opt for the gross method, because the difference between flat rate and standard already goes to the pl as you say BUT if it's a Ltd Company you must log it as a nett figure under the new FRS 102/105 rules Which reminds me that I need to swot up on this because thats the only rule I know.
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
Thanks for your reply but I'm still not sure I understand what I need to do. The difference for sales goes on the P&L. But what about the purchases? When I file the VAT return in QuickBooks nothing happens to the amount of those. So should I be recording the net or gross amount on purchases? ie should the company be claiming the gross or net amount as an expense on the P&L. I'm not sure I'm explaining myself well.
I can't comment on Quickbooks specifically because I don't use it. However, I assume the 'S' code is the normal standard rate code for expenditure with VAT, whereby the net amount debits the relevant expenditure nominal, and the VAT amount debits the overall VAT liability.
If so, they are correct: Use that code. The point is to use apples on both sides the equation, rather than apples on one side and pears on the other. What you are missing is where you say "When the VAT return is filed it then adds the VAT benefit to the P&L. So that's fine."
The VAT benefit should be the difference between the actual VAT (i.e. at the normal rate) on sales, minus the actual VAT on the expenses, minus the 8.5% VAT that has been paid at the flat rate.
Sometimes it's best to explain with an example - so to illustrate the way this works:
Let's say you have turnover in a quarter of £10,000 + VAT of £2,000. You also have expenditure of £5,000 with VAT of £900 (not everything has VAT, which is why it's not £1,000).
Your VAT liability on the flat rate scheme is 8.5% of the gross turnover - so £1,020.
Your VAT liability on the normal scheme would be £2,000 minus £900 - so £1,100.
The VAT benefit on the flat rate scheme is therefore £80.
Now look at the P&L using both methods (we'll assume the figures above are all there is to keep things simple).
On the flat rate scheme, the P&L shows turnover of £10,000 minus expenditure of £5,000 - and there the VAT benefit of £80 - so £5,080.
On the normal scheme, the P&L would show turnover of £10,000 minus expenditure of £5,000. i.e. it differs by the VAT benefit.
If you showed no VAT on the expenditure, the VAT benefit that QuickBooks calculates would still result in the same outcome - but the VAT benefit would look oddly high. In this scenario, the turnover would be £10,000, and the expenditure £5,900, leading to a profit of only £4,100 - but the VAT benefit to add to that would be the difference between £2,000 and the £1,020; i.e. £980 - which added to the £4,100 comes to (tada!) £5,080.
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Vince M Hudd - Soft Rock Software
(I only came here looking for fellow apiarists...)
I thought I was being really thick! But I've done it both ways in QuickBooks and you are right. One way the VAT benefit is higher and the expense is lower but the net profit is the same both ways. So actually it's probably more correct to use the right VAT codes as then the P&L will reflect the net cost and the VAT benefit will reflect the true difference in the VAT. Thanks for your help. Much appreciated.
Hi Vince, that's a very good explanation. However, my way is different to that (but then again I use VT+ which doesn't handle flat rate VAT)
Sales are recorded as £12000 purchases as £5900 and the VAT paid is an expense against the turnover. So turnover is reduced to ie 10800 less 5000 which results in 5080 profit.
That said Princess does have a flat rate ability so its best to use the figures nett of VAT on both sales and purchases and let the software do the work. The end result is the same.
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
It's only a good explanation if you ignore random missing words, etc. I'm sure they were there when I typed it. I must have knocked the keyboard, causing them to flip out and down the back of the desk. :/
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Vince M Hudd - Soft Rock Software
(I only came here looking for fellow apiarists...)
Hmm. HMRC have just left me a voicemail saying I should use gross amounts. I know the end result is the same but it would be nice if HMRC were giving the same advice as everyone else!
I wonder if they're talking at cross purposes - you use the gross [turnover] to calculate the VAT amount due, so perhaps if you've spoken to them and mentioned the net, they thought you were talking about calculating the VAT on the net?
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Vince M Hudd - Soft Rock Software
(I only came here looking for fellow apiarists...)
I don't think so. Her message was lengthy and detailed. If had to get a technical advisor to call back. The VAT helpline said they didn't know and that I should call the corporation tax team. They also didn't know.
The VAT helpline said they didn't know and that I should call the corporation tax team. They also didn't know.
Hi Princess
That's very worrying, the VAT helpline should know. More worrying is why you should call the Corporation Tax Team, as it has absolutely nothing to do with Corporation Tax.
To be honest, there isn't a right answer for sole traders, but as I said before, I prefer to go the gross route, and that is the advice HMRC give.
https://www.gov.uk/government/publications/vat-notice-733-flat-rate-scheme-for-small-businesses/vat-notice-733-flat-rate-scheme-for-small-businesses (see 7.8)
For Limited Companies, certainly under the new FRS regime, the nett route should be taken.
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
