Flat rate surplus

PsychePsyche Well-KnownPosts: 187Registered
Hi all! Another flat rate question (someday I will get my head round this, I promise!).

If someone is on the flat rate and has a surplus how is this accounted for? Normally it would be:
Sales CR 100.00
VAT Payable CR 17.50
A/Rec. DR 117.50

But on the flat rate it would be (Say rate of 12%)
Sales CR 100.00
VAT Payable CR 14.10 (£117.50 x 12%)
VAT Surplus CR 3.40
A/Rec. DR 117.50

And then the VAT Surplus would be a non-taxable income? Or is Corporation Tax due on the surplus? This seems unfair as the surplus is basically VAT which is not being reclaimed on purchases.

Thanks for any help.
~Psyche

Comments

  • RachelRachel Trusted Regular Posts: 349FMAAT, AAT Licensed Accountant
    I was told to treat it as other income and therefore taxable but I have searched and can't find anything to back that up
  • BluewednesdayBluewednesday Font Of All Knowledge Posts: 1,624Registered
    It is subject to corporation tax
  • qwertyqwerty Feels At Home Posts: 82Registered
    You record the transaction as follows:

    Dr Accounts receivable £117.50
    Cr Sales £103.40
    Cr VAT £14.10

    The amount is taxable. The surplus is not VAT which is not being reclaimed, the difference is assumed to be the input VAT which should be reclaimable for normal businesses in that sector.

    The expenses you are deducting are inclusive of VAT and therefore you are obtaining more tax relief as your expenses are higher. The 'VAT surplus', which increases sales, will increase taxable profit back to what it should be under the normal VAT scheme (in HMRC's eyes anyway, but most people who use the flat rate scheme are making a saving, otherwise they wouldn't use it).
  • MonsoonMonsoon Font Of All Knowledge Posts: 4,071FMAAT, AAT Licensed Accountant
    The surplus is taxable.
    And if it's a deficit, move off the flat rate asap!

    I record VAT as normal and post the normal box 5 figure to a dummy bank account as paid from there. This balances out the VAT control account.
    I then post the acutal flat rate amount paid, as a bank transfer from the actual bank account to the dummy account.
    The difference in the dummy account is the flat rate profit, and I balance the dummy account with a credit to other income, which is taxable.

    It's probably not the most elegant method but when worknig in a software package it's the way I like to do it, as then I can see if the FRS is still beneficial.
  • AK002AK002 Font Of All Knowledge Posts: 2,492Registered
    qwerty wrote: »
    You record the transaction as follows:

    Dr Accounts receivable £117.50
    Cr Sales £103.40
    Cr VAT £14.10

    The amount is taxable. The surplus is not VAT which is not being reclaimed, the difference is assumed to be the input VAT which should be reclaimable for normal businesses in that sector.

    The expenses you are deducting are inclusive of VAT and therefore you are obtaining more tax relief as your expenses are higher. The 'VAT surplus', which increases sales, will increase taxable profit back to what it should be under the normal VAT scheme (in HMRC's eyes anyway, but most people who use the flat rate scheme are making a saving, otherwise they wouldn't use it).

    This is what we do, it's essentially just extra sales, subject to CT.
  • PsychePsyche Well-Known Posts: 187Registered
    Ah I see, makes sense now I know to put the purchases through gross.
    Thanks for the help!
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