Flat Rate VAT and shop in a muddle!

anniemanniem Experienced MentorPewsey, WiltshireRegistered Posts: 1,325
:confused1: OK, mug here has new client. Small shop running flat rate scheme, so far so good. Then all the 'records' arrive ..... aaaaargh, what have I agreed to????

No bank recs, paperwork in a muddle, three different people running book-keeping - one writing cheques, one keeping books and third doing VAT Returns.

Shop is running to flat rate scheme - I haven't had dealings with flat rate scheme before, but have (or thought I had) basic understanding that VAT was calculated (at the flat rate provided by HMRC) on ALL sales. The shop doesn't currently record any VAT on sales.

Having reviewed the VAT calculations for the business, it appears that they have established the different percentages on purchases and then pro-rated the VAT on sales to the same percentages as purchases to calculate the VAT Return, applying the flat rate percentage somewhere along the line.

Firstly, can somebody just tell me that my understanding of Flat Rate VAT is correct and whether the complicated way that they have been calculated is an historic thing?

Secondly, would contacting the VAT office be the wisest option to sort it all out? At present I haven't done a full audit of the VAT situation, simply because the records are such a muddle and I don't have infinite time to sort it all out (plus they completely screwed me on price before I saw the records or knew what a state everything was in - LEARNING CURVE THINGY!)

On a positive note; I am putting them onto computerised software which will make life easier in the future and am taking the view that this is almost turning into a part time voluntary position, but some of the people involved are friends so it should be worthwhile in the long run. It is a community run shop and most of the paperwork is done by volunteers.

All help appreciated, as ever .....

Anna
FMAAT - AAT Licensed Member in Practice - Pewsey, Wiltshire

Comments

  • RachelRachel Trusted Regular FMAAT, AAT Licensed Accountant Posts: 349
    Oh dear

    Flat rate is % of all turnover, net + vat and thats it not purchases included. So no you are not wrong.
  • omega manomega man Trusted Regular Registered Posts: 283
    They could get a shock if they have underpaid their vat,i would think the vat people might put them down for a vat visit.
    Also,it might be that they are not on the most suitable vat scheme.
  • readerreader Experienced Mentor MAAT, AAT Licensed Accountant Posts: 1,038
    anniem wrote: »
    Firstly, can somebody just tell me that my understanding of Flat Rate VAT is correct and whether the complicated way that they have been calculated is an historic thing?

    Secondly, would contacting the VAT office be the wisest option to sort it all out? At present I haven't done a full audit of the VAT situation

    I think your understanding of the flat rate scheme is correct, i.e. charge the flat rate scheme percentage to all sales, gross sales that is, before any deductions for bank charges, purchases, etc:

    http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm

    If the shop is turning over more than £230,000 it is not allowed to use the flat rate scheme.

    I can't understand how the shop has messed up their VAT returns, surely all they have to do is add up all the sales (gross figure) and multiple by 7.5% (or whatever the relevant rate is for the shop and for the particular year that you are doing the accounts for). They may have used 6.5% if it is the first year that they are using the flat rate scheme because you get a 1% discount in your first year.

    Re: contacting HMRC's VAT Business Advice Centre, if the VAT error is more than £10,000 I would definitely contact HMRC. However in order to figure out whether or not the error is more than £10,000 I think you're going to have to visit the VAT preparer and get him/her to explain exactly what they have done. Before you visit the VAT preparer it is probably worth calculating the correct VAT liabilities so you can show the VAT preparer how things should have been done.

    Good luck!
  • anniemanniem Experienced Mentor Pewsey, WiltshireRegistered Posts: 1,325
    Turnover is under £230,000, but the VAT rate they seem to be using is 16.67% - which is another reason I want to investigate this further - it seems exceptionally high.

    All this factored in with the knowledge that it is organised mainly by volunteers who have changed in recent years, coupled with the knowledge that they have changed accountants a few times makes me wonder if anyone has actually reviewed or updated how they account for VAT and the procedures and rates in use.
    FMAAT - AAT Licensed Member in Practice - Pewsey, Wiltshire
  • readerreader Experienced Mentor MAAT, AAT Licensed Accountant Posts: 1,038
    anniem wrote: »
    Turnover is under £230,000, but the VAT rate they seem to be using is 16.67% - which is another reason I want to investigate this further - it seems exceptionally high.

    A 16% flat rate percentage doesn't even exist; the highest flat rate percentage is 14.5%.

    If anything it seems as if they have overpaid VAT! They should be due a large refund!

    If their turnover is £77,000 x 16.6% = £12,782 of VAT paid

    However VAT due is: £77,000 x 7.5% = £5,775

    Therefore refund would be £12,782 - £5,775 = £7,007

    I'd like to think that £7,007 is the minimum refund.

    It's pretty obvious that when you speak to the VAT preparer you'll learn that they weren't using the flat rate scheme or were doing it completely wrong.
  • anniemanniem Experienced Mentor Pewsey, WiltshireRegistered Posts: 1,325
    Yep, my thoughts exactly. But with the calculations they've used they have paid over much less than flat rate 16.67% and I really can't figure out what they've done.

    At the moment I've emailed to see what correspondence they have from the VAT office to try and determine exactly which VAT scheme they are on; I would have thought that flat rate scheme would be best for a village shop, selling newspapers and general groceries, but I stand to be corrected!

    Problem is the person doing the VAT has taken over from someone else and has just copied/utilised the existing spreadsheets without really knowing or understanding why!



    Aaaaaaaaaaaaaaaaaargh ...... *bangs head against brick wall*
    FMAAT - AAT Licensed Member in Practice - Pewsey, Wiltshire
  • readerreader Experienced Mentor MAAT, AAT Licensed Accountant Posts: 1,038
    All very interesting, given that the shop is selling food and newspapers (which is zero rated, i.e. no output VAT despite the fact that you can still recover input tax) it may be worth writing to HMRC to put them on a standard cash accounting scheme. It would be interesting to know which scheme (flat rate cash accounting vs standard cash accounting) helps the to business to pay the least amount of VAT. But as you have said, time isn't infinite and the client may not want to pay you for all this extra work. Either way, they are going to love you when you sort this all out.
  • omega manomega man Trusted Regular Registered Posts: 283
    I can see a vat inspection looming.
  • anniemanniem Experienced Mentor Pewsey, WiltshireRegistered Posts: 1,325
    OK, had a reply to my email. It appears that they aren't on Flat Rate Scheme, I was mistaken in thinking they were.

    This sort of explains some of the complexities of their VAT spreadsheet and the 0.1667 calculation is the gross to VAT - which if I hadn't been so stubbornly looking at it as Flat Rate is obviously working back to the 20% VAT Rate! :blushing:

    Krikey I think myself around in circles sometimes.

    Anyway have just done a rough calc and think that they could well be much better off on flat rate, it would have made over £4.5k improvement to the bottom line this year.

    Your thoughts please?
    FMAAT - AAT Licensed Member in Practice - Pewsey, Wiltshire
  • readerreader Experienced Mentor MAAT, AAT Licensed Accountant Posts: 1,038
    Glad that has all been sorted.

    It is probably worth showing the owner-manager the £4.5K saving and asking them whether or not they would like to go Flat Rate. I'm assuming turnover is less than £150,000?

    In times of plenty the FRS is normally quite good however if the shop begins to struggle they will not receive any VAT refunds. Does the owner-manager think things will go from strength to strength? If I was the owner-manager and I was presented with a £4.5K saving I would probably go for flat rate.

    Is the £4,000 saving consistent, i.e. £1,000 every quarter?
  • anniemanniem Experienced Mentor Pewsey, WiltshireRegistered Posts: 1,325
    They have just undertaken refurbishment, so have reclaimed some VAT on those expenses, which under the £2000 capital expenses rule on flat rate they wouldn't have been able to reclaim in the last year.

    Turnover last year circa £152,000, but as records are in such a muddle it's a job to tell if any of this is 'non trading' income; I think I've identified all gifts, donations, etc. Also on the FRS it's only standard, 5% and zero rates supplies to worry about, not exempt supplies, so I need to go back to my books and remind myself what fits into the different categories so I can see what I can squeeze out of the £152,000 to bring it under the £150,000 threshold. :ohmy:
    FMAAT - AAT Licensed Member in Practice - Pewsey, Wiltshire
  • readerreader Experienced Mentor MAAT, AAT Licensed Accountant Posts: 1,038
    anniem wrote: »
    Turnover last year circa £152,000, but as records are in such a muddle it's a job to tell if any of this is 'non trading' income; I think I've identified all gifts, donations, etc. Also on the FRS it's only standard, 5% and zero rates supplies to worry about, not exempt supplies, so I need to go back to my books and remind myself what fits into the different categories so I can see what I can squeeze out of the £152,000 to bring it under the £150,000 threshold. :ohmy:

    You can join the Flat Rate Scheme for VAT and so pay VAT as a flat rate percentage of your turnover if your estimated VAT taxable turnover - excluding VAT - in the next year will be £150,000 or less.

    So the important question is what do they estimate their VAT taxable turnover to be in the next year not previous.

    If a business has just turned over £140,000 in the previous year and that business has posted turnover of £75,000 in the first 6 months after the year end then it probably isn't allowed to enter the Flat Rate scheme and would probably get penalised should there be a VAT investigation (which may happen when the VAT the business begins to pay starts to fall as a result of being on the flat rate scheme). However if the turnover after the year end has fallen then there shouldn't be a problem.
  • anniemanniem Experienced Mentor Pewsey, WiltshireRegistered Posts: 1,325
    Need to start inputting the figures for this year now then!

    Thanks for all your help/advice Reader. We are not there yet; time will tell! :001_smile:
    FMAAT - AAT Licensed Member in Practice - Pewsey, Wiltshire
  • readerreader Experienced Mentor MAAT, AAT Licensed Accountant Posts: 1,038
    No problem and apologises if I have sounded like a pedantic dork at times. What is worrying is that I've found this thread infinitely more interesting than the England game. Not that I'm going to admit this in the real world.

    If you're near a TV the game has just gone to penalties!!!!! Not a good sign :(
  • MonsoonMonsoon Font Of All Knowledge FMAAT, AAT Licensed Accountant Posts: 4,069
    anniem wrote: »
    Having reviewed the VAT calculations for the business, it appears that they have established the different percentages on purchases and then pro-rated the VAT on sales to the same percentages as purchases

    This sounds like a Retail Scheme and is a valid way of calculating VAT if that's what they've chosen to do...

    I don't think you can mix that with flat rate though... could be wrong though
  • stevo5678stevo5678 Well-Known Cheltenham Registered Posts: 326
    Monsoon wrote: »
    This sounds like a Retail Scheme and is a valid way of calculating VAT if that's what they've chosen to do...

    I don't think you can mix that with flat rate though... could be wrong though

    Spot on, I was thinking that there was a specific scheme going on here as there was too much method to the madness!! I know we have a client who sells newspapers and has to do various calculations.

    This seems to hit the spot:

    http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ShowContent&id=HMCE_CL_000149&propertyType=document

    Nothing is ever easy :)
  • anniemanniem Experienced Mentor Pewsey, WiltshireRegistered Posts: 1,325
    Monsoon wrote: »
    This sounds like a Retail Scheme and is a valid way of calculating VAT if that's what they've chosen to do...

    I don't think you can mix that with flat rate though... could be wrong though
    stevo5678 wrote: »
    Spot on, I was thinking that there was a specific scheme going on here as there was too much method to the madness!! I know we have a client who sells newspapers and has to do various calculations.

    This seems to hit the spot:

    http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ShowContent&id=HMCE_CL_000149&propertyType=document

    Nothing is ever easy :)

    OK - this is where I get my knickers in a twist!!!!!!

    Why is it even more complicated; we are dealing with volunteers doing this for their community. They aren't VAT experts and I just think whatever they are doing is overly confusing and complicated.

    Problem I have is trying to establish if this is the best VAT scheme for them and I don't think they even know which scheme they are on!

    Where to begin ............. thankfully there are folk here who know more than me ....... I love you guys :001_tt1:
    FMAAT - AAT Licensed Member in Practice - Pewsey, Wiltshire
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