1st Year Flat Rate VAT Adjustments in Balance Sheet

Hello, I wonder whether anyone can help a newbie here…

  • I’m set up for Flat Rate VAT of 14%, Cash Accounting, using Version 1.0.
  • As I’m in my first year of trading I can actually run at 13%.
  • It is my understanding that to achieve this, rather than setting up as 13% in the Company Settings (VAT Settings sub-page), I have to manually adjust my VAT submissions each of the four quarters of my first year.

In my first quarter, there was one invoice for £2,054 +20% VAT = £2,464.80.
My VAT Return shows “Flat rate turnover inc VAT” of £2,465 and above “VAT due on sales and other outputs” of £320.42 and “Adjustments” of MINUS £24.65.

This all makes sense to me so far as 14% would have been VAT payable to HMRC of £345.07. The MINUS £24.65 takes it down to £320.42 which is the 13% equivalent.

So far so good… I think!

HOWEVER:

If I look at my Balance Sheet the Liabilities section shows:

  • 2202 VAT Liability = £320.42 (fine)
  • 2204 Manual Adjustments = £24.65 (?!)

If the £24.65 represents another 1% freebie from HMRC (effectively profit), why is it showing as a Liability rather than an Asset? I’m fine with 2202 being there; I owe HMRC the 13% £320.42…but I don’t owe the 1% £24.65 so surely it can’t similarly be treated as a Liability…?!

I’m SURE it will turn out that the system is working perfectly but I really would love to understand why this, on the face of it, is so illogical…

I attach the Manual Adjustment’s VAT Journal screen which shows the whole picture.

Many thanks in advance for your patience and anticipated helpful explanations…

When you adjust things in your VAT return that affect the amount of VAT payable, the contra entry goes to “manual adjustments” as you have seen, it’s then up to you to add another journal to move this amount from manual adjustments into the correct other place(s) on your chart of accounts. I guess in this case you’d journal the £24.65 from 2204 to 4999 (Flat Rate VAT sales adjustment) so it shows as increased turnover rather than a balance sheet liability. That’s where it would have ended up if you’d had the flat rate set to 13% to begin with.

1 Like

Thank you Ian; I’ve applied the changes and it now looks more sensible.