The method you are proposing is acceptable and is GAAP and SAP 5 compliant. However, instead of posting the Flat rate saving/loss to sales, I suggest you post it to an account called Â“Flat rate saving/lossÂ” or Â“Flat rate over/under recoveryÂ” as a separate line in the profit and loss account. Treat the savings you make a bit like a 'discount received' from HMRC. This way you can check whether you are actually benefiting from the flat rate VAT scheme or not. If for whatever reason, you go revert to the normal VAT scheme, your accounts will retain the same basis of preparation.
Revenue & Customs expect businesses using the flat rate scheme to prepare their accounts as if they are not registered for VAT, i.e. record both sales and expenses gross. The flat rate VAT payable is then deducted from sales. They even have an example demonstrating how the sales figure should be calculated using their preferred (cowboy) method. You will find their example by following the link below:
I donÂ’t agree with HMRC - what do they know about GAAP. I do not see how a tax election should influence or dictate the basis of accounts preparation. Accountants are expected to prepare accounts that comply with accounting standards (SSAP 5 in this case), that permit comparability and are 'true and fair'. Whether a taxpayer has elected to use the flat rate VAT scheme or the normal VAT scheme, the turnover and expenses in the accounts should be recorded in exactly the same way to afford comparability.
HMRC Notice 733 paragraph 12.16 http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageVAT_ShowContent&id=HMCE_CL_000345&propertyType=document#P625_62950
(which you will find by scrolling to the bottom of the screen) says:
"12.16 How do I prepare accounts for the Inland Revenue while I am using the flat rate scheme?
The Inland Revenue has confirmed that for businesses who are using the scheme, it is expected that accounts will be prepared using gross receipts less flat rate VAT percentage for turnover and that expenses will include the irrecoverable input VAT. For those businesses using the scheme for only part of a year, accounts figures for the time on the scheme should be added to those for the time not on the scheme to arrive at the total for the year. For both Customs and the Inland Revenue, there is a requirement to keep a record of sales and purchases. But, for businesses using the scheme, that record does not have to analyse gross, VAT and net separately. The records (whether normal system or flat rate scheme) need only be complete, orderly and easy to follow."
I hope that helps.