Discussion
I actually think that the Flat Rate Scheme is quite farcical as it flies in the face of the "logic" of basic VAT regulations. I fully expect a challenge from Brussels on the legality of the system.
However, regarding your situation, can you confirm that you actually showed an incorrect VAT liability on a previous return and it wasn't "only" an incorrect payment.
However, regarding your situation, can you confirm that you actually showed an incorrect VAT liability on a previous return and it wasn't "only" an incorrect payment.
VAT is supposed to be based on a figure calculated on sales/turnover at a set rate - based on the VAT regulations applicable to those types of sales. If your customer is VAT registered, they can claim back the VAT you have charged them. Obviously, you can claim back the VAT on your business costs.
The flat rate scheme allows you to charge VAT at a lower VAT level than the product or service you sell normally warrants. The disadvantage is that you are limited (although not completely blocked) in claiming back VAT on your costs. However, you customer still claims back VAT at 17.5% on the services you provided.
The inherent link between the VAT charged by you and the VAT reclaimed by your customer has been broken.
I wonder how many other countries in the EU operate such flat rate schemes?
The flat rate scheme allows you to charge VAT at a lower VAT level than the product or service you sell normally warrants. The disadvantage is that you are limited (although not completely blocked) in claiming back VAT on your costs. However, you customer still claims back VAT at 17.5% on the services you provided.
The inherent link between the VAT charged by you and the VAT reclaimed by your customer has been broken.
I wonder how many other countries in the EU operate such flat rate schemes?
Eric Mc said:
The flat rate scheme allows you to charge VAT at a lower VAT level than the product or service you sell normally warrants.
Eric, I might just be missing your point but the FRS does NOT allow you to charge VAT at a lower rate. What it allows you to do is to pay HMRC a lower rate back than the standard difference between input and output vat. Therefore, legally, there should be no issue - I still charge 17.5% and my customers will still claim back 17.5% etc it's just that I pay HMRC 13%. I total, it makes a difference of perhaps £1K a year. Probably saves HMRC that in administration quite easily
Am I missing your point?
It doesnt save the VAT people admin as they still process the same number of returns. It actually saves YOU admin and paperwork in that you no longer have to maintain much as much in the way of Input records as you aren't going to be claiming back Input VAT. That was the logic behind the scheme.
Obviously, for Income Tax or Corporation Tax purposes, you are still obliged to maintain and retain all the relevant backup paperwork for the figures in your accounts.
The scheme also causes a mismatch between figures calculated per the accounting regulations and the VAT figures. Accounting (and IT and CT) rules state that ALL the figures shown in the accounts have to be shown VAT exclusive. The correct Sales figure in the accounts should be the total value of all sales invoices raised LESS the VAT charged at 17.5% - this is the information your customers received. The total figure for costs and expenses in the accounts should be the VAT exclusive value of those costs.
Obviously if you are accounting for VAT the normal way, these figures fall easily out of your accounting records.
If you are on the VAT flat rate scheme, you are telling your customers that you are charging them 17.5% but in reality you are deducting VAT at a lower amount. Which Sales value do you show in your accounts? Sales less 17.5 VAT or Sales less 13% VAT? If you show the sales less 17.5% VAT (as normal) at least the total sales in the accounts will match with the total Outputs declared to the VAT man in the VAT returns. If you show the Sales less the lower VAT rates, you will show different sales figures in the accounts o what has been returned for VAT purposes. Traditionally, this has been an alarm point for either the VAT or tax authorities for launching tax investigation. Of course, now that both tax authotities (VAT and CT/IT) are now combined under HMRC expect more liaison between the two departmnets and therefore more investigations,.
It also causes problems in how you show the VAT on your costs. If you feel that the correct Sales figure is the Sales less 17.5% VAT (in order to minimise the liklehood of a tax enquiry), then you must allocate the difference in the two VAT amounts against costs in some way - although no tax authorities have suggested how this should be done.
It also causes problems for those who have to take the IR35 rules into consideration. IR35 states that the PAYE and NI payable by the company is calculated from a figure based on the VAT exclusive sales of the company. If on the VAT Flat Rate Scheme, which VAT exclusive Sales figure do you use. Again, no guidance has been issued by HMRC on this.
As far as I am am concerned, you really are "charging" VAT to your customers at the lower falt rate but the VAT authorities are "allowing" your customers to claim back at the Standard Rate. That's the basic "mismatch" I am referring to.
Obviously, for Income Tax or Corporation Tax purposes, you are still obliged to maintain and retain all the relevant backup paperwork for the figures in your accounts.
The scheme also causes a mismatch between figures calculated per the accounting regulations and the VAT figures. Accounting (and IT and CT) rules state that ALL the figures shown in the accounts have to be shown VAT exclusive. The correct Sales figure in the accounts should be the total value of all sales invoices raised LESS the VAT charged at 17.5% - this is the information your customers received. The total figure for costs and expenses in the accounts should be the VAT exclusive value of those costs.
Obviously if you are accounting for VAT the normal way, these figures fall easily out of your accounting records.
If you are on the VAT flat rate scheme, you are telling your customers that you are charging them 17.5% but in reality you are deducting VAT at a lower amount. Which Sales value do you show in your accounts? Sales less 17.5 VAT or Sales less 13% VAT? If you show the sales less 17.5% VAT (as normal) at least the total sales in the accounts will match with the total Outputs declared to the VAT man in the VAT returns. If you show the Sales less the lower VAT rates, you will show different sales figures in the accounts o what has been returned for VAT purposes. Traditionally, this has been an alarm point for either the VAT or tax authorities for launching tax investigation. Of course, now that both tax authotities (VAT and CT/IT) are now combined under HMRC expect more liaison between the two departmnets and therefore more investigations,.
It also causes problems in how you show the VAT on your costs. If you feel that the correct Sales figure is the Sales less 17.5% VAT (in order to minimise the liklehood of a tax enquiry), then you must allocate the difference in the two VAT amounts against costs in some way - although no tax authorities have suggested how this should be done.
It also causes problems for those who have to take the IR35 rules into consideration. IR35 states that the PAYE and NI payable by the company is calculated from a figure based on the VAT exclusive sales of the company. If on the VAT Flat Rate Scheme, which VAT exclusive Sales figure do you use. Again, no guidance has been issued by HMRC on this.
As far as I am am concerned, you really are "charging" VAT to your customers at the lower falt rate but the VAT authorities are "allowing" your customers to claim back at the Standard Rate. That's the basic "mismatch" I am referring to.
Edited by Eric Mc on Friday 9th June 09:27
Eric Mc said:
However, regarding your situation, can you confirm that you actually showed an incorrect VAT liability on a previous return and it wasn't "only" an incorrect payment.
ahhh i see what you're getting at. yes, incorrectr liability shown and subsequently, incorrect payment made.
they owe me money!!!
The point I was trying to make was, if the error was due to incorrect Output or Input values being entered on an earlier return (and consequently incorrect Input or Output VAT being declared) then you MUST reflect the correction by altering the Inputs and/or Outputs and the corresponding Input or Output VAT on a subsequent VAT return.
If you had completed the VAT return correctly AND calculated the VAT liability correctly but then paid over the wrong ammount in error, then no adjustment would be necessary on a subsequent return, only an amended payment needs to be made to HMRC.
If the VAT error was £2,000 or more, you need to complete a separate VAT Error Declaration form. In other words, you cannot fix the problem by merely amending a subsequent return.
I hope that clarifies matters for you.
If you had completed the VAT return correctly AND calculated the VAT liability correctly but then paid over the wrong ammount in error, then no adjustment would be necessary on a subsequent return, only an amended payment needs to be made to HMRC.
If the VAT error was £2,000 or more, you need to complete a separate VAT Error Declaration form. In other words, you cannot fix the problem by merely amending a subsequent return.
I hope that clarifies matters for you.
Edited by Eric Mc on Friday 9th June 10:13
Thanks for the clarrification Eric.
My Company accounts that have just been finalised have addressed your questions above by doing the following (which, after checking with my current accountants they have claimed to be the correct way!)
1 - revenue/sales figure shown is the net sales figure (sales less 17.5%) but PLUS the saving in VAT as a result of the FRS
2 - the expense figures (contrary to your comment above) are shown inclusive of VAT. This is only done for FRS registered Co.s so for a normally registered VAT company, the expenses as you say would be declared net of VAT.
You'll know better than me but the two things combined seem to me to address the overall issues caused by the FRS in declaring VAT figures, revenue and expenses in the P&L.
Eric Mc said:
The scheme also causes a mismatch between figures calculated per the accounting regulations and the VAT figures. Accounting (and IT and CT) rules state that ALL the figures shown in the accounts have to be shown VAT exclusive.
The correct Sales figure in the accounts should be the total value of all sales invoices raised LESS the VAT charged at 17.5% - this is the information your customers received. The total figure for costs and expenses in the accounts should be the VAT exclusive value of those costs.
....bit snipped...
Which Sales value do you show in your accounts? Sales less 17.5 VAT or Sales less 13% VAT? If you show the sales less 17.5% VAT (as normal) at least the total sales in the accounts will match with the total Outputs declared to the VAT man in the VAT returns.
The correct Sales figure in the accounts should be the total value of all sales invoices raised LESS the VAT charged at 17.5% - this is the information your customers received. The total figure for costs and expenses in the accounts should be the VAT exclusive value of those costs.
....bit snipped...
Which Sales value do you show in your accounts? Sales less 17.5 VAT or Sales less 13% VAT? If you show the sales less 17.5% VAT (as normal) at least the total sales in the accounts will match with the total Outputs declared to the VAT man in the VAT returns.
My Company accounts that have just been finalised have addressed your questions above by doing the following (which, after checking with my current accountants they have claimed to be the correct way!)
1 - revenue/sales figure shown is the net sales figure (sales less 17.5%) but PLUS the saving in VAT as a result of the FRS
2 - the expense figures (contrary to your comment above) are shown inclusive of VAT. This is only done for FRS registered Co.s so for a normally registered VAT company, the expenses as you say would be declared net of VAT.
You'll know better than me but the two things combined seem to me to address the overall issues caused by the FRS in declaring VAT figures, revenue and expenses in the P&L.
I suggested BOTH methods.
The version your accountant is using is the one I use too. However, as I explaimed above, it does result in the Sales figures in the accounts being different to the Outputs figires declared in the VAT returns.
While it is totally explainable, it does add an element of "difference" between the figures declared in the accounts and VAT returns to what is now the same tax authority (HMRC) and may well entice a tax or VAT inspector to query how the discrepancy arose.
As you no doubt already know, the Revenue are no longer authorised to ask straight queries on accounts, but to launch straight into full blown enquiries.
The version your accountant is using is the one I use too. However, as I explaimed above, it does result in the Sales figures in the accounts being different to the Outputs figires declared in the VAT returns.
While it is totally explainable, it does add an element of "difference" between the figures declared in the accounts and VAT returns to what is now the same tax authority (HMRC) and may well entice a tax or VAT inspector to query how the discrepancy arose.
As you no doubt already know, the Revenue are no longer authorised to ask straight queries on accounts, but to launch straight into full blown enquiries.
What a great thread... perfect justification for using the services of a good accountant, backed up by a good software package that facilitates the accurate maintenance of records, whilst calculating your VAT liability for you automatically... well 99% of the time anyway...
If only we could get HMRC to understand how difficult they make things for the small business, and their own audit team... These days they 'talk the talk' of making things easier for the small business, but I'm yet so see any evidence of this...
If only we could get HMRC to understand how difficult they make things for the small business, and their own audit team... These days they 'talk the talk' of making things easier for the small business, but I'm yet so see any evidence of this...
That's the 99% bit... no really.. In the small business space, all I have come across is a combination of Accounts (mini ERP) and Final Accounts Production products, i.e. ERP keeps the records and would work out the liability for most non FRS if used correctly, then the data is fed into the FAP product and 'enhanced for FRS regulations'. Of course in the enterprise world there are a number of ERP products that better support FRS.
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