I am a bookkeeper preparing a clients accounts using the VAT flat rate scheme. I understand how Solar Accounts treats the VAT showing appropriate net values and a running Gain/Loss account due to use of the scheme. I am very impressed.
HMRC indicate that expenses should be accounted for including VAT under the FRS. It appears to me that the only P & L report in Solar shows the net expenses. A workaround would appear to be to input all expenses at 0% VAT rate. This would appear to input gross values to P&L but would not impact on the correct VAT treatment as VAT is only accounted for based on the income. The only downside would be that you would not know the correct gain or loss being made on the VAT scheme.
Do you have any views on this and the preparation of accounts to suit HMRC requirements.
Hello Leslie,
Thanks for your interest in Solar Accounts. Our understanding is that while HMRC suggest expenses be recorded including VAT when under the flat rate scheme, they will also accept the treatment used in Solar Accounts (ie. recording the net gain/loss on the flat rate scheme).
Recording VAT at 0% on purchases is fine, although as you point out it makes it harder to determine what effect the flat rate scheme has on the bottom line. It also makes it more difficult to compare costs with periods that don't include the Flat Rate Scheme. Beyond that we cannot offer guidance on which treatment to use.
Regards,
I also have a question regarding the Gain/Loss shown for the Flat Rate VAT scheme, that is of a similar nature.
It's quite excellent that Solar Accounts shows this line clearly in the P&L, however I am not sure of the treatment of this Gain/Loss within my corporate tax calculation. I have searched and cannot find anything in this regard on the HMRC website.
For example: I expect a gain from using the Flat Rate VAT scheme this year of approximately £6k. Should I be paying corporation tax on this gain?
I'd be grateful for your guidance here.
Hi Angel,
Yes, you must pay corporation tax on any profit you make due to the flat rate scheme for VAT. So in your case you will need to pay corporation tax on the £6k.
There different ways of calculating your income and expenses under the flat rate scheme. Solar Accounts shows the income and expenses excluding VAT, then adds the gain due to flat rate scheme as an additional income category. For example, say your gross income was £1,800 and gross expenditure was £600 and flat rate is 10% then the Profit and Loss report looks like this:
Income: £1,500
Expenses: -£500
Gain due to Flat Rate Scheme: £20
Net Profit: £1,020
An alternative is to show income including and expenses including VAT, then add an additional expense for the flat rate VAT paid to HMRC:
Income: £1,800
Expenses: -£600
Flat Rate VAT Expense: -£180
Net Profit: £1,020
My understanding is that both methods are acceptable to HMRC for the corporation tax return because they both give an accurate account of the company profits. However, I'm not an expert on corporation tax - you should check this with your accountant or local tax office.
Regards,
Hi Mark,
Sorry to dredge up an old issue, however I've been challenged by someone questioning the gain/loss on VAT treatment being used by Solar.
I understood from our earlier exchange that you could either (a) record expenses in the P&L including VAT, or (b) record expenses excluding VAT and post the flat rate VAT impact separately (i.e. the Solar Accounts method).
Do you have a reference to HMRC guidance that states this? I cannot find anything and I've searched far and wide.
Never mind, I found it!
It's on this page http://www.hmrc.gov.uk/manuals/bimmanual/BIM31585.htm
Under Computation of trading profits, second paragraph.
"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."
