General UK VAT accounting query (slightly OT)

[Maf. King]

On Thursday 10 Mar 2005 06:57, andy thomas wrote:
> This is not really a gnucash question but as it's something that might
> be of interest to others who pay a sales tax of one sort or another,
> such as the UK VAT scheme, I thought I'd ask here.
>
> In our gnucash accounts, we enter sales as gross amounts (ie, value of
> the sale + 17.5% tax) and expenses, etc are also entered as gross amounts.
> Every three months we pay the tax due to the government and this is
> accounted for as an expense. At the end of the financial year, I create a
> trading/profit & loss and balance sheet using the gross figures from which
> I deduct the VAT payments as an expense.
>
> Reading an accounting book on the train yesterday, it occurred to me that
> maybe we should be using net amounts in our accounts and keep VAT in a
> completely separate account. So the trading/P&L and balance sheets will
> show lower amounts throughout (17.5% less) but then there would be no
> deduction for VAT expenses so the final profit should work out the same.
>
> Is this the right way to go about it? Book-keeping/accounting books for
> small businesses all seem to illustrate different ways of handling VAT so
> I guess it doesn't which method is used as long as it's used consistently.
>
> Andy
>

FWIW, and IANAA etc. etc.

My business keeps all income/expenses as net, with splits to Asset/Lability 
accounts to keep track of VAT.  That way, there is a line the the account 
tree which clearly shows the current VAT position (ie how big the bill is 
getting!)

However, so long as you are consistent, I don't think the taxman will mind.

One thing that I can see as a problem with your way - when you come to fill 
out the VAT return, how do you know how much input tax to reclaim?  Not all 
expenses have the same VAT rate, and I don't see how you can calculate from a 
total expense figure what the VAT portion is.


Maf.