Some items which I invoice are not subject to vat, such as official government fees paid on the client’s behalf. There’s an option on the invoice to set non vatable items as no vat and it correctly calculates the vat for the invoice. However, when I do a vat return it ignores the invoice vat amount and calculates the vat due from the gross.
e.g. an invoice has official govt fee of £1000 (no vat) and our fee of £100+vat = £1120 gross but the vat return thinks the £1120 is £933.33+vat.
Apart from manually adjusting the vat return, is there a way to avoid this?
Are you on the flat rate scheme?
Yes 16.5%…surely I don’t owe vat on the whole gross!
That is how the flat rate scheme works in general, yes, and the HMRC guidance does warn you that if you make a larger amount of zero rated sales than is usual for your business sector then you may end up worse off on FRS than you would be on normal VAT accounting.
However I know there are special rules about disbursements so it may be worth checking with your accountant whether you’d be permitted to exclude those from your FR turnover.
urrghhh…thanks! So on an invoice with £10,000 official fees and £100+vat our fees, the vatman wants £1,686.67 in vat not the £20 the client was charged! Nice!
Flat rate percentages are set by HMRC based on the typical split of standard and zero rated sales and the typical profit margins for each business sector, but you can lose out if you aren’t “typical”. In particular if you’re a limited cost business with a FR of 16.5% you’ll almost always be better off not using the flat rate scheme at all.
If you were charging 20% VAT on all your sales and claiming back no VAT whatsoever on any purchases then that would be equivalent to a flat rate of 16.67% (FR is a percentage of the sales total including VAT, whereas the 20% VAT rate is a percentage of the net excluding VAT). If the vat you’d be eligible to reclaim on all your costs including things like energy bills, phone and internet, etc amounts to more than 0.17% of your gross turnover or you’re making basically any zero rated supplies, then you’ll probably be better off financially if you don’t use flat rate.
It’s definitely worth going over your own specific numbers with your accountant.
Further reading of the FR VAT documentation from HMRC suggests that disbursements can be excluded from your flat rate turnover, so it’s definitely worth checking with your accountant on this one.
Yes thanks for that. I’d already taken the liberty of adjusting my vat return and will chat to my accountant about coming off the fr scheme.
The Flat Rate Scheme, is a “percentage of your turnover” paid over to HMRC, it has in most cases, absolutely nothing to do with which items are or are not vatable. But as already said, some items can be excluded.
You really should have researched this prior to signing up, a simple calculation, to determine whether FRS or normal vat scheme was more beneficial should have been done.
Just so you know, if you decide to leave the FRS, you can not rejoin it again for 12 months.
So whatever you do, be absolutely sure, its the correct one.
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