Oh dear, it turns out we don't get VAT back...

[Keith A. Milner]

On Thursday 16 Jun 2011 12:16:45 Keith A. Milner wrote:
> On Thursday 16 Jun 2011 10:14:55 edpsystems wrote:
> 
> What I would do (and this applies to both amending old bills and new ones
> if you wish to capture the tax amount separately) is create a line item
> for VAT within the same account as the main item. You can enter formula
> into the Gnucash amount boxes, so if the item was 10 Euros plus 4% VAT you
> can enter 10*.04 into the tax line and it will caclulate the value for
> you.

I read this again and realised I wasn't clear.

By this I mean on the bill create two entries:

Bleach             Expenses:Groceries  1 10.00
VAT on Bleach  Expenses:Groceries 1 10*0.04

Obviously you should make sure Gnucash doesn't also add VAT to these.

However, I'm still not convinced this is the right way to go.

Ultimately it boils down to how you (and your accountant) want to report on 
these. Previously, before I was VAT registered, I used to account for VAT in 
the same way as you did (an Expense bucket for VAT), and my accountant was 
happy enough with this. I also don't break Income/corporation tax down into 
individual categories based on how the associated revenue was generated.

Consider that, if you do register for VAT in the future, you will typically 
need to record VAT expenditure in a "bucket" account (usually liabilities) as 
you were originally doing. As soon as you do this you are changing the way you 
are recording and reporting this tax expense. This makes the reporting before 
and after the change different in that, prior to recording VAT in it's own 
account, expenditure on groceries will appear to be between 4 and 18% higher.

Quite frankly, I don't see how the ability (or otherwise) to claim back VAT 
makes any difference to how you deal with this. In almost every case you'll 
only ever be able to reclaim a portion of the VAT paid anyway. there will 
always be some VAT amount as an overhead. At the moment it's 100%. Maybe if 
you VAT register it goes down to 80%, but if you are doing VAT accounting that 
basically means that your VAT payments cannot be categorised against other 
accounts (or at least not easily).

Of course IANAA and your Accountant may have advised you differently for some 
reason I'm not familiar with.

Cheers,


-- 
Keith A. Milner