I am changing from the flat rate scheme to standard VAT accrual accounting. I have paid quarterly VAT via HMRC making Tax digital via Quickfile for more than 1 year and it calculates flat rate VAT correctly but changing to standard VAT it now assumes I have not paid any VAT at all ever and calculates a huge VAT Bill. This is clearly incorrect. The accounting system must know which cases have had VAT already paid.
Thanks for your help resolving this error.
Hi @AntEmm
When you’re changing VAT schemes, it’s likely that an adjustment of some sort will be required to make sure everything is correct.
Were you on acrual accounting with the FRS?
Hi Matthew
Yes QF does accrual accounting for the profit /loss for the year but the fixed rate scheme is not accrual as it is based only on income received when worked out by QF.
What I am surprised about is that the invoices where the VAT has been paid do not seem to be taken into account and now that I have changed over it is assuming that no VAT has been paid and is calculating a massive VAT bill. Even if I were to make the huge adjustment of eliminating all the inappropriate cases the first time this would have to be done every 3 months as the issue would continue.
Hi @AntEmm
The FRS can be either cash or accrual basis, depending on your VAT settings (and your eligibility).
I’m guessing you’ve changed from cash basis with FRS, to accrual basis on normal VAT now - is that correct?
No it wouldn’t. The adjustment will only be required on the first return under the new scheme, future returns should be correct as all the previous invoices will have been locked down by the first adjusted return.
Yes I think that is correct by HMRC’s rules
Ian
Thanks - I don’t understand then why all the VAT returns under the flat rate scheme done under quickfile are not already locked already so it only looks at the unlocked invoices?
It all depends whether you’re on cash or accrual accounting. Whether or not you’re on flat rate, in QuickFile submitting an accrual VAT return locks invoices but not payments, submitting a cash accounting VAT return locks payments but not invoices. If you’re switching from flat-rate-on-accrual-basis to regular VAT on accrual basis then I’d expect it to do the right thing automatically, but if you’re switching from flat-rate-on-cash-basis to regular VAT on accrual basis then you’ll have to make the adjustments.
Thanks that is helpful in understanding why the calculation is so far out.
Is it the case that when I make a manual adjustment on the first new standard VAT that it sets all the previous invoices to locked so will be correct going forward?
That’s right, the rule is that any accrual VAT return will lock all sales and purchase invoices that are:
Going forward, everything up to the end of the previous quarter should be excluded by number 3, but anything from earlier quarters that was entered “late” (after you submitted the relevant return) will be pulled in at the earliest opportunity.
Also you will need to add an extra journal after your first return to straighten out your balance sheet. The first standard VAT return will include the VAT element of all your historic sales invoices as debit sales tax control and purchases as credit purchase tax control, but your manual adjustments to compensate will go on the “manual adjustments” nominal. So you’ll also need to create another journal to reverse these (credit sales tax control, debit purchase tax control and debit/credit manual adjustments to balance).
Thanks that is helpful