Questions about how QF handles VAT FRS: Overstating the benefit? How to monitor?

[murrayzz1]

I’ve just migrated to Quickfile and I’m a little confused about the VAT FRS.

In my previous system, which was not MTD, I entered all purchase invoices with the VAT separated out. This enabled me to run a standard VAT report at the end of the quarter, which I could compare with the flat rate VAT to make sure that it still made sense to be in the scheme.

I would then manually calculate the FRS VAT and enter that on my return.

However, as far as I can tell, Quickfile doesn’t allow you to enter output tax at all, and calculates the FRS VAT automatically. It then posts the difference between the input VAT collected and the actual VAT paid as a gain, which as I understand it is treated as taxable revenue.

Have I understood that correctly?

There are two problems with this that are confusing me:

Problem 1

Hitherto, the amount that I have been posting as the gain from the scheme is the difference between the VAT I would have paid if not in the FRS and the actual VAT paid.

This seems to be a more accurate representation of the actual gain from being in the scheme. Treating the gain as the difference between the input tax collected and the actual VAT paid ignores output tax completely, and therefore overstates the benefit.

Let’s use the example in the help file to illustrate the problem:

• £1,000 - General Sales
• £200 - Sales Tax
• £1,200 - Gross Total

When we file the VAT return lets say we have a flat rate of 10%. We will pay GBP 120 to HMRC, therefore using the above example we need to adjust the Sales Tax down by GBP 80 and increase the General Sales by GBP 80. The result looks something like this:

• £1,080 - General Sales
• £120 - Flat Rate @ 10%
• £1,200 - Gross Total

This treats the gain as £80. But what if there were £300 of VATable costs? Then if not in the FRS, the calculation would look like this:

• £1,000 - General Sales
• £200 - Sales Tax
• £1,200 - Gross Total
• £300 - Expenses
• £60 - Output Tax
• £140 - Actual VAT due if not in FRS

So the benefit from being in the scheme isn’t £80, it’s only £20. It looks like the method Quickfile uses overstates the benefit and will result in paying too much Corporation Tax.

Where is the fault in my reasoning?

Problem 2

The second problem is that if I cannot record the output tax, there doesn’t seem to be any way of monitoring whether the scheme results in paying less tax or more.

This is an important question. If it results in paying too much tax I’m better off out of the scheme.

So how can I monitor this without implementing a cumbersome manual process to run alongside Quickfile, which defeats the object entirely?

Any help offered would be gratefully appreciated.

Thanks

[Eddie_B]

For Flat Rate VAT, you can do a manual quarter, or yearly calculation to see what’s best for your business.

I was on on the scheme, many years ago, and in fact, was worse off, then being on the standard, when they changed the percentage rates.

Lets say, per quarter, as follows:- (No single £2,000 capital expenditure expense, in example, as this accounts differently)

Turnover £30,000 plus vat £6,000 = (£36,000 including vat)

Expenses £5,000 plus vat £1,000 = (£6000 including vat)

so you would pay £5,000 in vat and have a pre tax profit of £25,000 on standard vat scheme.

On your 10% scheme

£36,000 x 10% = £3,600 (£6,000 - £3,600 = £2,400 to come off vat and go as extra turnover / income

so,

Turnover £32,400

Expenses £6,000 with a pre tax profit of £26,400 which is £1,400 more pre tax profit.

---

Expenses of £10,000

Turnover £30,000 plus vat £6,000 = (£36,000 including vat)

Expenses £10,000 plus vat £2,000 = (£12,000 including vat)

so you would pay £4,000 in vat and have a pre tax profit of £20,000 on standard vat scheme.

On your 10% scheme

£36,000 x 10% = £3,600 (£6,000 - £3,600 = £2,400 to come off vat and go as extra turnover / income

so,

Turnover £32,400

Expenses £12,000 with a pre tax profit of £20,400 which is £400 more pre tax profit.

I personally don’t know how quickfile calculates flat rate vat, but would guess it’s done correctly. The key to such scheme is to simplify vat, and not to make money from it, hence why the rates were changed a few years back.

If you go through your accounts, better over a year, you can see which works best, but personally again, for me, the standard scheme is simpler to account for, but may not be the best for each individual business.

A lot will depend on your % rate, turnover and what expenses you have.

[Paul_Courtier]

All well and good but none of that was what the op was talking about.

Op was referring to being able to look at the figures as if they were treated as a normal vat scheme and compare whether the vat due would be more or less than the flat rate paid, to determine whether its worth continuing to be on the frs or not in any particular period.

Ive not bothered to look but a vat report showing this info would be good.

In the past when I have had to manually calculate frs vat it wasn’t an issue since I had the figures there to see whether frs was still beneficial. But if quickfile does the calculation for you, there are no comparative figures to check against. So I agree with the op.

[Eddie_B]

Hi Paul.

I got what he was asking, and as far as I believe, no accounting software gives a side by side vat account period, constantly, of standard and flat rate vat, running together, so basically you could toggle a switch to see which is best for your business, at any given time.

Hence why I was saying, a simple out of software calculation, could give such. Yes, if that’s what is needed, then of course it would be helpful.

But, as I previously said, the scheme was never set up, or intended for businesses to make a financial gain.

Ill give you a little paragraph from a letter I received, when I was on it, from HMRC, March 2017

"The Flat Rate is changing,

The Flat Rate Scheme is a simplification scheme, NOT a tax allowance. More and more often, its being used for a cash benefit, rather then for simplification, exploiting the scheme in such, gives an unfair advantage over other businesses, unable to use the scheme"

and so on.

VAT is not there for businesses to make money from.

Many thanks
Eddie

[Paul_Courtier]

Eddie. Hmrc can state that all they like, but you, me and others know full well that businesses will operate which ever vat scheme enables them to pay the least amount of vat.

Further, there is nothing stopping someone from leaving frs if it means they will pay less vat. The only downside to this is not being able to rejoin for a further 12 months.

[murrayzz1]

Hi Paul & Eddie

Thank you for taking the time to reply to my query.

I know how to do the calculation to compare the two schemes, and as Paul says, like every other business I will choose the option that results in the lowest tax liability. That’s just good business and common sense.

The problem is that Quickfile doesn’t appear to allow tracking of output tax if on the FRS - which means that I would have to do what Eddie describes as an “out of software calculation”.

In other words, I would have to manually track my output tax separately, thereby negating any administrative advantage in using the FRS.

Whilst there might not be software that allows you to toggle between the two schemes, it would surely be better to allow output tax to be tracked within the software to produce a quarterly output tax figure that allows an “in software calculation” instead.

Any thoughts on Problem 1? Is the benefit from the scheme not the difference between what is paid in the scheme and what would be paid out of the scheme?

My sample calculation shows that to treat the benefit as the difference between tax collected and tax paid ignores output tax altogether, and risks overstating the benefit to the extent that the additional CT could wipe out the benefit altogether.

What do you think?

Thanks for your help and interest.

[eglesb]

FRS does simplify things as you don’t need to track the vat on every purchase. This also means you can, for example, use a credit card for all travel expenses and just post a single total for each credit card bill.
On the standard scheme each line might have different vat as things like train tickets might be zero rated and overseas expenses ineligible. I’m happy to do a rough “is it worth it” estimate separately without going through all that detail just to get an exact answer.
If you are going to do all that detail anyway then I agree a quickfile report would be a nice feature.
There is also the complexity of the “limited cost trader” FRS rule to consider so quickfile would also have to tag every purchase item a as goods or not for the job to be complete.