IR35 Query..VAT Return.. How do I

Under the beloved IR35, I have to Invoice my Supplier at full VAT on Gross Income. They deduct TAX and NI at source, and pay the Net balance. However, VAT is the problem. Working through the invoices in Quickfile, I can replicate what my invoice looks like, (Gross cost + vat), and then add the TAX and NI deductions through as negatives and zero rated VAT.

The problem arises when I look at the automated VAT return, which has reduced my Flat Rate Turnover down reflecting the zero VAT deductions, yet I am liable to pay HMRC on the Gross Turnover VAT figure… With the other grand idea of MTD coming forth, how do we get around this. If there is no fix, we will under pay the VAT, and under disclose the real gross revenue… and I can’t seem to manually override the Auto Vat return?

many thanks…

Read that

Wouldn’t worry about mtd, frs is the last thing on hmrcs mind atm

Thanks for the reply, but it’s not relevant to the problem in hand. The problem in had is that if we are to automate the VAT return from next year, the system is not reflecting the Gross Vatable turnover, and therefore under providing the correct flat rate treatment. It amends it to the net total turnover, which by HMRC is incorrect.

However as the IR35 causes adjustments to this in the invoice of non Vatable deductions, it doesn’t pull through the higher number. I have no queries as to the nominal codes etc around the flat rate treatment, just the automated calculation that is wrong. It could be the deductions at source for IR35 need a different approach but I can’t see how? They do need to come off the net invoice somehow, so assumed my treatment would suffice?

This is an anomaly only for those that I am aware operate inside IR35, which post 2020 will include the contractors in the private sector as well as us operating in the public. A very live problem…

Would it work to treat it kind of like the standard work around for CIS in QuickFile?

  • create a dummy “IR35 holding account”
  • create the sales invoice for the full amount without deductions
  • mark it paid in full into the dummy account
  • treat the net payment from the customer as a transfer from the dummy account to your real current account

This leaves the amount of the deductions as a positive balance (debit in nominal account terms) in the dummy account, which you could then move by journals or “something not on the list” type tagging to wherever you’re currently putting the zero-rated negative lines.

This should give the right vat return results but it means your sales invoice in QuickFile won’t show the deductions - if this is a problem then you’d have to generate the documents you send to the client outside of QuickFile.

Many thanks ian_roberts

Using your view ref CIS, I have solved the issue for IR35 (Hopefully)

   Create Dummy IR35 Bank Account
   Invoice Raised at Full Gross, no deductions (option 1, option 2 below)
   When it's paid, I split payment - Actual amount paid into current account, deduction amount into 
   Dummy IR35 Account.
   Create a transaction from Dummy IR35 Account to (4000) General Sales which then nets off the 
   Income from P&L and keeps the VAT return whole.

In order to get around the invoicing piece, and for the actual invoice, you can raise the invoice with the deductions on at non VAT level, print/save and send to client, and then modify the invoice in Quickfile after it has been generated to remove the deductions, so Client stays happy, and so does the record keeping. Almost like you need two copies…

One actual, and one for accounting software…

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