General UK VAT accounting query (slightly OT)

andy thomas andy at netstat-a.net
Thu Mar 10 07:54:17 EST 2005


On Thu, 10 Mar 2005, Maf. King wrote:

> 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!)

I think I might switch to doing things this way - our second financial 
year ended only 5 weeks ago in January and we haven't yet submitted annual 
accounts to the authorities. So it would be easy to alter them now to 
show net amounts with splits to asset/liability accounts for VAT as you 
suggest.

I suppose VAT (VAT due, or our output tax) that is waiting to be paid to the
government is a liability as it's not our money, we're collecting it for 
them (although I suppose we could even invest it to earn interest until it's
due to be paid on). And the VAT we have paid our suppliers (our input 
tax) is a liability (although I thought liabilities were something we had 
charge of temporarily, like a loan, but had to pay back eventually?).

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

We keep a separate "book" for VAT (actually, just a plain text file on this
computer at present).

> 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.

Not a problem as we have the original suppliers invoices, receipts, etc 
and the VAT is worked out on paper anyway. I'm not currently using gnucash 
for VAT although I'd like to start doing this.

Thanks for your suggestion,

Andy

-------------------------------------------
Andy Thomas,
netstat -a llp

Tel: +44 (0)7815 060872
Fax: +44 (0)20 8372 2582
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