Using a journal to account for VAT on margin sales

I am just about to file my first return using this software but I can’t find an easy way to allow for VAT on margin sales.
I buy and sell used plant and machinery and although mostly the items are bought with VAT, I occasionally buy items from individuals who are not VAT registered then when they are sold, I don’t charge VAT to the customer but still have to pay VAT on the margin. ( difference between purchase and sale price.)
Prior to MTD, I used to keep a log of all margin sales and manually enter the VAT on my spreadsheet which would then calculate the numbers for my VAT return.
Should I be using a journal to alter the sales values so it calculates the correct VAT as at at present, the software is not showing and VAT for these sales. When I try, there doesn’t seem to be any change in my VAT liability.
Alternatively, is there another way?.

The journals won’t be included in VAT return calculations I believe.

This guide suggests just entering a second line on your invoice to account for the VAT on the difference, which will then be picked up on the VAT return.

Is that legal. I understand that margin sales must not show any VAT in case the buyer is VAT registered when he could falsely reclaim the VAT on the margin.

You couldn’t issue that invoice to the customer. I suppose what you have to do is issue a plain invoice produced outside of Quickfile.

There is probably a ridiculously complicated way of doing it all within Quickfile with dummy accounts and invoices etc but I think just knocking up an external invoice will be the easiest method.

There has to be another way because to send a different invoice to the customer than the legal document used to record sales is definitely illegal.
How can I proceed now as I have to file my VAT return by Aug 7th.

The “legal document” is by definition the one you send to the customer, the “invoice” you’re creating in QuickFile is just a book keeping mechanism to get the right numbers into the software to produce a correct VAT return - no different from the way that I run a retail shop where the actual invoices are the till receipts I give to my customers but the “invoice” in QuickFile is one record per day with the aggregate totals.

So you could use the approach Lurch suggests going forward but if you’ve already issued zero VAT invoices to customers for your previous margin sales then you’ll need to make a manual adjustment on your return to account for those - work out how much of those zero vat invoices should be VAT and journal it from credit “manual adjustments” to debit “general sales” (or wherever the original invoices were posted).

Now when you come to submit the return use the little drop down arrows to adjust box 1 up and box 6 down by that same amount. The journal generated by your VAT return will debit manual adjustments to balance things back out.

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True. If you’re on accrual accounting for VAT then it’d be sufficient to create a dummy client record, raise a fake invoice against that client on the same date as the real zero VAT invoice with the margin VAT recorded as above, then immediately credit that fake invoice in full but as full net and zero VAT. The credit note would cancel out the value of the invoice you sent to the customer without them seeing it as a credit and the fake invoice would put the value back into your records with the margin VAT recorded. For original cost C and margin M you end up with

  • original customer invoice C+M net, no VAT
  • dummy invoice C @ no VAT, 5/6 of M @ 20% VAT
  • dummy credit C+M net, no VAT

If you’re on cash accounting it may be more involved because I doubt you can simply credit the fake invoice without paying it (well, you can, but I don’t know whether the return will pick it up - I’m on accrual myself so I don’t have practical experience of doing cash accounting returns). Once you’ve been paid by your real client you’d have to create the dummy margin VAT invoice, mark it as paid on the date the client really paid you (into a spare bank account like drawings or petty cash, or a dummy account created for the purpose), then credit note the paid invoice as zero VAT on the same payment date and refund it from the same bank account.

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On cash accounting you’d have to zero the dummy account before submitting VAT returns I think.

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I have already given invoices to my customers showing no VAT .
I have created a journal to make the adjustments but maybe I am doing it wrong. For each margin sale I made an entry under general sales (4000) and debited the full sales amount. I then made a second entry again under general sales and credited the lower amount without the margin VAT. Finally, I made a third entry under VAT liability (2202) where I credited the Margin VAT. This brings the balance back to zero but it doesn’t change the box 1,3 5 or 6 entries on the VAT return panel.
Am I doing something wrong?.

I think the VAT liability account is after the VAT return, i.e. the VAT liability account looks at the nominals the VAT return uses. Bear in mind this is not something I do and I am not an accountant, but the nominals you need to adjust are elsewhere.

So which category can I use to influence the VAT return?

You can’t, not directly. You need to do what I suggested above and journal the difference to “manual adjustments” rather than “vat liability”. Then when you prepare the actual return you need to use the little arrow buttons in the VAT return boxes to manually adjust box 1 up and box 6 down by the same amount and this will balance out the manual adjustments nominal.

QuickFile only considers sales & purchase invoices (or payments) when calculating the VAT return. It never includes journals automatically, you have to make the adjustment yourself on the return form.

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So, I’ve changed the journal as you suggested. The adjustments I make to the VAT return boxes are not saved so if I leave the panel, they disappear. Is that how it’s supposed to be?.
I guess if I make the changes then hit submit immediately, they are locked in for the return but it seems a bit risky without a trial run.
Is there any way I can request a change to the software to accommodate margin sales as I can’t be the only person having to jump through these hoops!.

Yes, nothing is actually saved until you press the submit button. What you can do is fill in the adjustment boxes and then “download calculations” again immediately (before submitting) and the resulting CSV will include your adjustments. What I tend to do when I have to adjust a return is do this, reconcile the resulting CSV with my own calculations, add some notes to the file to explain it and then save the calculations spreadsheet and upload it to my QuickFile document manager area for safe keeping. If I ever do then get inspected in future I can quickly find all the explanations in one place.

I found that little trick earlier so will do it whenever I need to alter the inputs.
Why doesn’t the software allow for margin sales as it must be a fairly common situation with smaller businesses?.

Doing the margin scheme calculations properly would basically require QuickFile to keep an electronic copy of your whole stockbook so it knows the cost price of each individual item to calculate the margin. QuickFile staff have said on various threads that they aim to keep QuickFile as a book keeping and accounting package, and not get too involved with things like inventory control or payroll - better to leave stock control to a dedicated stock control app, payroll to a dedicated payroll app, etc. and offer an API that allows data from those to be pushed into QuickFile as necessary for book keeping.

I see that would be a bit involved but surely an option to allow manual entries for the margin which would then be included in the VAT return should be possible.
I don’t really see how a separate stock control App would help as it still wouldn’t integrate.

There are loads of VAT and tax schemes to account for that aren’t mainstream. They are all “only a simple job” to integrate them! Feel free to find or create a feature on adding the margin scheme. There are a few others that are more common than the margin scheme that still aren’t directly integrated yet, like CIS.

I think the point is Quickfile is an accounting package, but to do the margin scheme correctly it would need to know your stock so it could keep track of the margin. You can integrate external stock control packages with Quickfile but it would still take some doing to get it all to “just work”.

Oh well. I guess I will have to use the work around each quarter.

That’s exactly what the suggested workaround above does (with two lines, one for the cost at zero VAT and one for the vat-inclusive margin calculated gross-to-net at 20%). But you’re right that the document QuickFile produces in this case is not suitable to serve as the sales invoice you give to your customer under the margin scheme - you would have to create a separate invoice document to send to the customer, for example using a stock control app that is designed to work with the margin scheme (if there is such a thing), or just manually in Word.