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Flat Rate - Bookkeeping entries

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Postby allison » Wed Jan 11, 2006 8:06 am

I am consider using the flat rate scheme which should save me approx. £2K pa in VAT.

How do I correct the Balance Sheet ~ the VAT creditor will be wrong.



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Postby PJR » Thu Jan 12, 2006 12:25 am

I assume you mean that when you adjust your expenses for input VAT, your creditor will be wrong? Just adjust the Flat Rate VAT through sales, leaving gross expenses figures in the P&L. Only other adjustment necessary would be if your bought any assets over £2000.

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Postby allison » Thu Jan 12, 2006 7:38 am

Thanks for replying.
I use Sage Line 50 and had assumed that all - sales and purchases - entries were processed using 17.5% VAT. I thought the only difference was that when I wrote the cheque out I calculated the amount on the flat rate % of the Net Sales and posted this entry to my VAT account.

This would then mean my VAT account on the Balance Sheet would be overstated.

I wondered if at the year-end I would need to do a journal (debit VAT, credit sales/p&l ac) ~ this would then mean I pay more in income tax.

I.e. what you gain from the vat you give to the tax.


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Postby jwm1 » Thu Jan 12, 2006 8:21 am


You are correct you do need to adjust your VAT creditor and the P&L with the result that you will be taxed on the savings you make.

A simple example of say income of £1,000 and a flat rate of 12% would result in income of £1,034 (Gross sale of £1,175 less 12% flat rate) and a VAT creditor of £141 (12% of Gross sales).

Entries would be

Dr Debtors/Cash £1,175
Cr Sales £1,175

Dr Sales £141
Cr VAT Creditor £141

All expenses are booked to your P&L at the gross amount under the flat rate scheme and hence do not touch your VAT account.


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Postby allison » Thu Jan 12, 2006 1:00 pm


Thanks for your reply ~ am beginning to understand. In your example the additional income is £34

"All expenses are booked to your P&L at the gross amount under the flat rate scheme and hence do not touch your VAT account".

I would prefer to leave the Sage settings as they are and have the P&L net of VAT and then DR VAT a/c £34 + CR Sales £34.

Would I be "allowed" to do this?

Thanks for your help.


Tax Practice
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Postby Tax Practice » Sat Jan 14, 2006 4:58 pm

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 “Flat rate saving/loss” or “Flat rate over/under recovery” 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.

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Postby allison » Sun Jan 15, 2006 11:21 pm

Yes. Thanks for your help.

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Postby libbyC » Wed Jan 25, 2006 6:14 pm

I found this very interesting. I am an engineer trying to get my head around tax and right now Flat Rate Scheme / Sage / IR. I have same problem.
I have read Jamies advise and IR articles mentioned.
The advice of Notice 733 is not published in the document sent out, but is on the web.
The manual is also all clear.
However read this from the IR http://www.hmrc.gov.uk/worksheets/sa103-notes.pdf
It says book it as an expense and enter in box 3.63.
Mathematically it does the same,but are there not clear rules to what one must do?

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Postby trash » Wed Jan 23, 2008 8:02 am

Is there any accounts software that deals with FRS automatically?

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Joined: Wed Aug 06, 2008 4:05 pm

Postby hrbs » Thu Feb 14, 2008 2:06 am

The Liberty Accounts online software deals with FRS and online filing. It is only available via selected accounting partners.

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