XBert Type: Standard
Accounting Software: Xero, QuickBooks Online
Country Restriction: United Kingdom only
Risk Type: Tax Risk
Business Function: Purchases
Overview
This XBert checks bills that reclaim input VAT when your business is on the VAT Flat Rate Scheme (FRS). On the FRS you pay HMRC a fixed percentage of your gross turnover and, in return, you cannot recover input VAT on ordinary purchases. When a bill still has input VAT coded against it, your VAT return overstates the amount you can claim back. Catching it before you file lets you correct the figure now, instead of facing an HMRC adjustment, interest or a penalty later.
What it does
It reads that your organisation is on the VAT Flat Rate Scheme, then looks at bills that still have input VAT coded against them. For each one it checks the VAT reclaimed against the gross value of the bill, so you can see the amount of VAT that should not have been recovered. The correct treatment on the FRS is to record the VAT as part of the cost of the purchase rather than as recoverable input tax, and this XBert highlights where that has not happened.
How it works
The XBert raises a flag when your business is on the Flat Rate Scheme and a bill still has input VAT reclaimed on it. To keep the flag accurate, it only fires when:
your organisation is recorded as being on the VAT Flat Rate Scheme;
a bill has input VAT coded against it; and
the purchase is below the £2,000 capital-goods threshold, where the scheme does not permit input VAT recovery.
The only exception to the no-reclaim rule is a single capital asset costing £2,000 or more including VAT, so the XBert focuses on ordinary purchases below that threshold. Reclaiming input VAT on these overstates box 4 on your VAT return and understates the VAT you owe HMRC.
Example/Use Case
Priya runs Hartwell Design Studio and is registered on the Flat Rate Scheme, paying HMRC a fixed percentage of her gross sales. Her assistant, new to the file, codes the monthly bills the same way he always has, picking the standard 20% VAT rate on a £540 software subscription so the £90 of VAT lands in box 4. Because Hartwell is on the FRS, that VAT should have been left in the cost of the subscription, not reclaimed. Over the quarter the same mistake repeats across stationery, courier and subscription bills, and the VAT return goes out claiming around £600 of input VAT it was never entitled to. When the bookkeeper reviews the file before year end, she has to unwind each bill, submit an error correction to HMRC and explain the underpaid VAT, all of which could have been avoided by coding the purchases as gross from the start.
Accounting software
This XBert runs on bills from Xero and QuickBooks Online.
Which countries it supports
This XBert applies to the United Kingdom only. It uses VAT Flat Rate Scheme rules specific to the UK.
Processes
Business area: Purchases. To resolve a flagged bill:
Select RESOLVE NOW to open the bill in Xero and review the line or lines carrying VAT.
Check whether your business is genuinely on the Flat Rate Scheme.
If it is, re-code the reclaimed VAT so it forms part of the gross cost of the purchase, using a No VAT or zero-rated treatment so nothing lands in box 4.
Leave the VAT reclaimed only if the bill is a single capital asset of £2,000 or more including VAT, which is the scheme's exception.
If you have left the FRS, update your VAT settings so future bills are coded correctly.
If the VAT period has already been filed, follow HMRC's process to make an adjustment or error correction for the overclaimed VAT.
Once corrected, mark the XBert as resolved.