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Chart of Accounts for Flat Rate Scheme

When you choose one of the Flat Rate Schemes for VAT in Financial Settings, the screen says in rather small print -

in your Chart of Accounts, all asset and expense accounts will be changed to 'No VAT' by default
new tax codes will be added to your Chart of Accounts, for VAT on Capital Purchases and Sales.

However, you are then free to upload a new Chart of Accounts (CoA) at a subsequent step in the setup process - no warning is given if you over-ride the first point above by using (for example) 17.5% (VAT on Expenses) for expense accounts. As far as I can see the new tax codes for VAT on Capital Purchases and Sales remain as options after uploading a new CoA.

We did not spot the "small print", or indeed the same statement in Help, and have now set up a company with what would be a CoA for "standard VAT".

We started with a downloaded CoA from Xero Help which only offers -

"If you want to start off with the Xero default Chart of Accounts in CSV format in order to make a few changes before importing, download one of the following files:

Chart of Accounts for a VAT registered organisation
Chart of Accounts for a Non-VAT registered organisation"

and chose the first one, which was changed by modifying/adding accounts to suit our business, but leaving the tax codes for assets and expenses as they would be for "standard VAT".

After completion of setup we successfully entered transactions from 1 April to the end of September using coded bank statements, which is a wonderful feature.

The first VAT return (from 1 June to 31 August) calculates the correct FRS VAT when compared with our old spreadsheet calculation.

It seems to me that Xero should make it clearer that there is an FRS CoA. It would also be sensible to make one available for download from Help since I'm sure many users will prepare their CoA before getting into setup.

However, the main question is - do I need to start again with an FRS CoA? I can see that the VAT Account (820), the Audit section of the VAT Return and the VAT reconcilliation Report are affected, but does that matter? Will my next VAT Return be wrong? Is anything else in our accounts wrong?

In some ways, it seems more sensible to me that VAT on Expenses is shown as 17.5%, which is surely correct in most cases - even on the FRS.

On a related point, the FRS VAT Return shows "The amount of VAT you have saved by using the Flat Rate Scheme", which is numerically correct relative to the Output VAT in 820, which is of course the only VAT in 820 if you use an FRS CoA. However, it is surely misleading since no account is taken of the Input VAT that would be reclaimed under standard VAT, and is therefore not the saving with respect to standard VAT?

Aplogies for the length of the post!

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Permalink Reply by gsgordon on October 10, 2010 at 17:21

OK, I can see our current setup screws up the Balance Sheet and Profit & Loss! The value of 820 appearing on the BS is wrong and the P&L is based on Net Revenue and Net Costs & Overheads, as it would be for "standard VAT".

With the FRS-type CoA, the P&L will be based on Net Revenue, but Gross Costs & Overheads. Journaling the VAT to a Revenue type account will presumably have the effect of grossing up the Revenue and taking off the FRS VAT Paid, thus creating the correct "FRS Profit" before company tax.

Can you please confirm that the best (and only) solution involves starting again with an FRS-type CoA? Would it be better to get Xero Support to clear the organisation and start with a clean slate?

I still think that Xero and Xero Help are a bit unhelpful on this score. The need for "No VAT" on assets and expenses should be highlighted better and the reasons clearly explained. I also think the final paragraph of my post above still applies (VAT saved being misleading); is there any simple way of calculating the true saving on VAT?

Regards, George [making mistakes is very often the best route to understanding, as long as it isn't expensive!]

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Permalink Reply by Catherine (Xero) on October 11, 2010 at 1:54

Thanks for the points about Help Centre and the omission of a Flat Rate COA for those who want to prepared their COA in advance - I'll check to see if we can include this as a template in a future release. As for whether or not you need to start again, I'll have to get some assistance from our Customer Care team as I'm not sure of the best approach.