Flat rate scheme and end of year accounts?

stulaunch · 19 August 2014 at 11:33AM

Hope I've posted in correct forum.

I need a little advice on my end of year accounts.

In my 1st year of FRS. My accountant has put my gross earnings down including VAT charged. I then have my list of expenditure, ie, small amount of materials, motor costs etc.

So now my taxable income (income over expenditure) is a fair bit higher than last year, meaning my income tax bill has increased and this year I get no tax rebate as I usually do. I have 20% stopped at source, as in building trade.

I would have thought that my payments to IL throughout the year on my VAT returns would have been taken of my gross income? There is nothing in my expenditure column.

Surely in my case if it is not offset then I'm better out of FLS because I am paying significantly more income tax which is far more than the bit I make from the flat rate scheme? I do not claim any vat back either.

I understand if you say "ask your accountant" I have an appointment with them, but just wanted to understand it a bit more before I go.

As you surely realise, my knowledge in these matters are minimal, so if explanations can be as simple as possible I would be grateful.

TheCyclingProgrammer · 19 August 2014 at 12:13PM

You should only be paying income tax (or corporation tax for Ltd companies) on the difference between the gross amount (including VAT) and the flat-rate VAT you pay to HMRC, which should result in a small surplus over the net amount due to the flat rate being a lower percentage (this surplus is intended to cover your input VAT costs that you can't recover but if your expenses are low it will often result in an overall profit from the scheme).

Pennywise · 19 August 2014 at 12:36PM

Two ways to show it in the accounts, both deduct the VAT payments from your profit.

Option 1 is to deduct the FRS VAT from your gross turnover.

Option 2 is to show the FRS VAT payments as an expense in the P&L account.

If the accounts show neither, they're likely to be wrong unless the accountant has done something else, such as an adjustment direct to the tax return itself (rare but I've seen it done!).

What VAT liability is shown on the balance sheet - should be just the last quarter?

theEnd · 19 August 2014 at 1:13PM

I'd expect the FRS to increase your profits, but only by a small amount.

Say if your income is 100k, your expenses £20k and your flat rate 12%:

OLD
Income £100k+VAT
Expenses £20k+VAT
VAT Paid £16k (= 20k - 4k)
Profit £80k

NEW
Income £100k+VAT
Expenses £20k+VAT
Flat VAT Paid £14.4k (= 12% of 100k+VAT)
Profit £81.6k (= 80k + (16k - 14.4k))

chrismac1 · 19 August 2014 at 1:14PM

My preference is a third option. I simply account for VAT in the normal way, and let's say for a given quarter that would be £3,000. The FRS payment is £2,000 let's say. The £1,000 then gets coded to the profit and loss as "benefit arising from flat rate VAT".

Advantages:

1. Every client can see in the accounts exactly how much better off he or she is by being in the scheme. Maximum benefit is around £5k, for the life of me I can't understand why in a period of crisis we were messing around with silly pastie taxes whilst allowing free profits on VAT. Across my client base there must be at least £50k of profit per year.

2. For those clients where the business changes - for example a change in the cost base - and they leave flat rate for normal VAT, the transition is easy and if you are putting accounts in front of lenders you don't need to say "sales are down 15% due to leaving flat rate VAT" at which point most lenders scratch their heads.

TheCyclingProgrammer · 19 August 2014 at 3:08PM

I'm with chrismac1 - showing your flat-rate "surplus" (i.e. the difference between the gross sale inc. VAT less your flat rate percentage) under its own coded account in your books makes it very easy to see how much you are benefiting from the scheme.

If you subtract all irrecoverable input VAT over the course of your year (so all input VAT except for VAT on capital purchases over £2k or any reverse charged services which are accounted for outside the FRS) from your "surplus" you can see if you are continuing to profit from the scheme or not.

If your input VAT starts to exceed your surplus then you should consider leaving the scheme as you will be making a loss.

This is exactly how FreeAgent, which I use to manage my books, does it.

Flat rate scheme and end of year accounts?

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