VAT Calculation Problems

1

I think there is a bug somewhere in Manager with regards to VAT Calculations.

According to my Tax Reconciliation for the last year, I have been out £92.72 each quarter. I have worked out what has happened.

I paid my VAT Bill on the 31st March 2017 according to what Manager said I owed HMRC.

However, in April 2017, my accountant claimed £92.72 in Vat for Business Mileage and she entered that as a Journal entry for 31st March 2017. So I actually should have paid HMRC £92.72 less than I did.

My question is why is Manager not telling me this? How do I get Manager VAT Calculation Worksheet to reflect this overpayment?

1 Like
2

This cannot be answered without knowing how tax codes were applied in the journal entry and what was being debited and credited. In other words, we need the details.

3

On my summary page, it shows as £852.73 as payable and on my VAT Calculation worksheet it shows as £945.45 - the difference of £92.72.

On 31st march 2017 I credited account Business Mileage £548.88 with no vat and debited the account same amount but with 20% vat.

There is a £1.24 difference which occurred a couple of months earlier, but for the sake of simplicity, I am including that amount to make £92.72.

Maybe the VAT calculation Worksheet is correct in that its showing the tax spent and received for the latest quarter but should it not have an option to deduct any excess tax paid in the previous quarter?

4

The easy part first:

Reports can only draw upon transactions during the defined period between From and Until dates. Think about the sources of information. The VAT Calculation Worksheet does not “know” what payments you have made to the tax authority. It basically only “knows” about taxes assessed and paid on sales and purchase transactions during the defined time frame. (Technically, it also knows about taxes assessed or paid on debit and credit notes, journal entries, and so forth. My point is that it tracks transactions affecting Tax payable.)

The worksheet is only meant to calculate figures related to the defined period. It is not a tax filing form to determine what you owe the authority. It’s figures do not take into account whether you have over- or underpaid at any time in the past.

So you are right. The worksheet is correct for what it is designed to do. If you overpaid in the past, that seems to call for an amended filing or adjustment to the current filing, but not a change to worksheet calculations for the current period.

Now for the more complex part of your inquiry:

It still is not clear exactly what happened. In your first post, you say your accountant entered the 92.72 as a journal entry in April. In your second post you describe a credit and debit to Business Mileage in March. Did your accountant make an entry in your Manager records? Or in her copy of your records? In other words, just how did she make this entry and where? What accounts did she debit and credit for how much? And why did you also make an entry? (Or are you just saying she instructed you in April to make an entry and you did so with the journal entry dated in March?)

Then we have the fact that journal entries are always tax-inclusive when a tax code is applied. A 20% VAT amount of 92.72 corresponds to an underlying transaction amount of 463.60. If you were making journal entries with such a transaction amount, the tax-inclusive figure you should be using is 556.32. So I do not see where you got your 548.88 number.

It also isn’t clear how the 1.24 difference enters the picture. Is that included in the 92.72? Subtracted from 92.72? Please explain further.

Overall, it seems you are trying to rectify a prior failure to apply a tax code to mileage expenses by crediting the expenses without a tax code and debiting them back with a tax code. Do I understand correctly?

If so, I wonder why you don’t just correct the original expense entries. I also wonder how you are calculating the expenses. It sounds like you are probably using a standard rate. If so, is that possibly already inclusive of VAT considerations? If it is, it is not appropriate to further burden the expense with VAT. If it is not, and the original expenses must have VAT added, a journal entry doesn’t strike me as the best way to accomplish this. Instead, I would use a supplemental expense claim. A journal entry is problematic because it needs to balance debits versus credits. And what you seem to be attempting is to balance an untaxed expense against a taxed expense. There is an inherent mismatch you cannot resolve as you described. (Or at least as I think you described.)

5

Yes for some reason I was expecting the VAT Calculation Report to take into account that I had overpaid my vat in that previous quarter. You are quite right. It only shows the dates that I put in and is basically meant to calculate the VAT for that quarter!

I will need to contact my accountant and ask her to sort out an amended filing or whatever with HMRC as we effectively need to correct the quarter filed 31st march 2017 as what I filed with HMRC is not what I should have filed.

My accountant filing:

My accountant received my accounting file in April and she created a journal entry dated 31st March to do the transaction. She edited my Manager accounting file. The way she did the debit/credit was for one side to have no VAT and the other side to have VAT and this effectively creates a VAT refund for me as I can see by looking at my Summary Information which shows the correct amount of VAT I should be paying this quarter.

I have no idea where the £1.24 comes from. I suspect that there was either a bug in Manager around that period with regards to inventory disposal (I seem to remember some VAT bug with inventory disposal sometime back that Lubos fixed) and this might be where the errant £1.24 came from as I wrote off a couple of small items. All I know is that there is a discrepancy of £1.24 which is unrelated to the petrol vat issue. But I have no idea where the discrepancy comes from and frankly its too small an amount for me to care about. I would rather write off the £1.24 than spend three hours trying to find out where it came from.

No I am not trying to correct a prior failure. My accountant created the journal entry for 31st March upon receiving my accounting file in April to basically apply a tax refund to me for the business mileage. I have no idea how she works it out. So there is no original expense to fix per se.

Having said that I will contact her and ask her if we can apply the business mileage vat reduction at the point of time when I pay myself business mileage as this would ensure that we don’t have a journal entry every year and the VAT refund is in the accounts during the quarter being filed rather than being added restrospectively. I think that this is what you are trying to say that my I should be doing? And I think that is a good idea.

The business does not pay for Business Mileage. I pay for my petrol for my car and every quarter I claim 25p a mile for the business mileage done. There is no VAT for the business to pay as the business is re-imbursing me for my mileage. However, my accountant said that I am able to claim VAT on that mileage (how she works it out I don’t know) and this is what the Journal Entry is about - to create that VAT refund.

I think that once we have fixed the VAT bugger up that I currently have, then I need to pay myself mileage every quarter and at the same time, the business needs to claim VAT on that mileage all in one transaction. This would prevent further problems in future and eliminate the need for Journal entries.

6

Yes. Always better that the initial transaction avoid any need for correction entries later.

You are correct there is no VAT for the business to pay directly. You are presumed to be paying the VAT when you purchase petrol on the company’s behalf. You should be entering that through an expense claim, applying the 20% VAT tax code. Manager treats tax codes on expense claims as tax-inclusive (no option). So if you purchase 100 worth of petrol, with 20% VAT added at the pump, you would enter an expense claim as 120. Tax payable will adjust accordingly and you should need no journal entry at quarter’s end.

One possible complication, however, is that when you use an allowance, you are not purchasing anything directly. You are being reimbursed on the basis of assumed costs. So you need to be sure the tax code applies to everything in the allowance. I don’t know HMRC’s specific rules, but in jurisdictions I’m familiar with, a mileage allowance includes petrol, maintenance, depreciation, wear and tear, and so forth. You need to confirm everything covered is subject to the same tax code.

7

I have just been putting in the business mileage on my payslip every quarter. I don’t think that expense claims is the correct procedure as you normally need an invoice for every expense claim and I am not claiming for just the petrol (or all of the petrol). As you state, I am claiming for depreciation, wear and tear, maintenance etc, not items bought on behalf of the business as it were.

This might explain why my accountants figures and yours differ as she may not be including VAT on everything?

I will email my accountant and ask how we should proceed with this based on UK Laws.

i think the answer is to perhaps make the business mileage account vatable in chart of accounts and re-imburse myself the ex vat amount or something.

8

No, you don’t need an invoice for every expense claim. From your business’ perspective, an expense claim is much like a purchase invoice. It documents what the business owes to the expense claim payer, and it creates a liability.

Yes, an expense claim generally requires corroboration. That could take the form of an invoice you had paid personally. Or it could be a contemporaneous mileage log meeting standards set by your tax authority. But, as explained by the Guide on using expense claims, they are perfect for allowances.

You’ve been a little confusing about just what the mileage expense account is being used for. It can be appropriate to post allowance-based expenses calculated from distance travelled there. It can also be appropriate to post actual expenses, such as fuel, tires, maintenance, etc. But in most jurisdictions, you must use one or the other, with the allowance rate including fuel, depreciation, maintenance, etc. When the choice is left to the taxpayer, you must consider the effort of logging trips versus that of recording every vehicle-related expense. Allowances are most frequently used when the business is reimbursing a private vehicle owner for business use. Actual costs are more common when the vehicle is owned by the business.

9

Well I have my mileage logging program which should be more than sufficient corroboration for tax records.

No, you misunderstood what I meant. I am only claiming 45p a mile for business trips. The UK government use that figure to cover depreciation, maintenance etc. I am only claiming for x number of miles travelled, but this ultimately results in my claiming for depreciation, wear and tear etc. I don’t directly claim for deprecation etc. That is based on the 45p a mile for business mileage allowance.

I use a mileage logging program that plugs into my car. This records the miles, so all I have to do is import the trips onto my computer every month and it calculates the mileage allowance etc for me.

10

OK, the HMRC approach sounds like it matches what I know of in other countries. So an expense claim listing business miles traveled each month, with the 20%VAT tax code applied should work perfectly. Those trips that you bill directly to clients can be posted to Billable expenses instead of Business Mileage, with the same tax code treatment. You should end up with the correct balance in Tax payable, easy invoicing of mileage expenses to customers, and no need for journal entries.

I haven’t tested it, but I think when you invoice for billable mileage expenses you should apply the tax code. That should properly reflect the input VAT accrued to your business by “buying” the miles from you personally and the output VAT from “selling” the miles to your customer. I would run an example and show it to your accountant for approval.

11

I don’t bill my clients for mileage. That is not how my industry works. My clients pay an annual contract every year. I just claim mileage from the company for business trips using my car (not owned by the business).

But clearly all I need to do is add vat to the business mileage on my books and pay myself the ex vat amount in re-imbursement. I have just emailed my accountant now who will hopefully sort out the vat discrepancy and then sort out future payments.

12

While this response is off topic, but that suggested accounting treatment is poor advice and an abuse of the Billable Expense process.

If a business is entitled to charge their customers for mileage, then such a charge belongs as income within the business, it is totally inappropriate for a business to secrete its income over as income of the vehicle owner on the pretence of cost recovery.

The purpose of Billable Expenses is to pass through arms length third party transactions, the Billable Expenses shouldn’t be used to generate income transactions on behalf of a non arms length party.

13

@dalacor, I haven’t “studied” all of the banter but it appears as the Journal created by your accountant should have been entered as an Expense Claim via the same process:

“On 31st march 2017 I credited account Business Mileage £548.88 with no vat and debited the account same amount but with 20% vat.”

Expense Claims would adjust the Worksheet and hence the Tax Payable account, whereas the Journal (I suspect) would only adjust the Tax Payable account, being only a financial transaction rather then being a purchase/supply transaction.

Whilst the Journal didn’t adjust the worksheet, was the tax aspect of the transaction reflected in any of the March 2017 tax reports, if yes, then it is a bug as the worksheet isn’t catching all tax transactions.

14

It is not an abuse of the process at all. Billable business mileage can be regarded as an expense for a service purchased on behalf of the customer. In this case, the service is transportation of necessary personnel to a job site, just like transporting construction workers to a building site. The provider of the service (the expense claim payer) has no reason to go to the customer’s site for own-business functions; she goes only for the customer’s reason. When this is processed as a billable expense, the net effect on P&L is identical to posting mileage reimbursements as income and offsetting by posting mileage as expense.

You can also mix mileage recovery approaches. That incurred for customers can be posted as billable expenses. That incurred for direct, own-business operations and not billable to a customer can be be posted directly to the mileage expense account via an expense claim.

That was exactly my advice, for the reason you repeated.

15

I have emailed my accountant and pointed to this link, so all the information is there.

The only reason that I resist using Expense Claims is because it entails the use of another tab which will only have four transactions per year. If I can do it another way that would be ideal, but not the end of the world.

yes the Journal entry was meant to only affect the Tax Payable account. That is what I think my accountant intended. But I am in agreement, I think it makes sense to do the transaction in one go including the vat aspect so we don’t have two separate transactions in Manager for the same entry effectively and more importantly to ensure that this problem never occurs again.

I am a bit confused as to whether there is a bug or not, because the same thing happened in March 2016 and yet somehow my VAT accounts in Manager correspond with HMRC accounts in the sense that I have not carried forward the 2016 discrepancy beyond one quarter, whereas I seem to have carried forward the 2017 discrepancy into later quarters. I can’t see why and I have mentioned this to my accountant as I am not clear why two basically identical transactions seem to have been affected differently. it would seem that in 2016 the VAT Calculations registered what I had overpaid in the next quarter, whereas the 2017 has not.

16

But only when it’s agreed between the business and the customer that a particular service being charged is being purchased on a sub-contractor basis. If the business alone, just elects to charge on that basis without any customer agreement then it is a total abuse of process.

This convenience perspective isn’t justification for secreting direct business income off the books, nor is it providing full and proper disclosure as to the businesses activities.

17

As your business is a operating as a corporation, then Mr Dalacor, being a separate legal identity and owner of the vehicle, could submit a Purchase Invoice (text document) supported by the mileage logging program output.

Then you can’t expect it to be reflected in the VAT worksheet.

18

Granted. But why else would you be charging them mileage unless the terms of the contract or engagement allowed it?

It’s not “off the books.” The expense claims and subsequent sales invoices are all recorded and preserved in the Manager data file. Nothing is hidden; everything is completely auditable. Here is a fairly typical definition of income:

Income is the earnings gained from the provision of services or goods, or from the use of assets.

Costs reimbursed in accordance with terms of a contract are certainly not earnings. While you can choose to record all revenues to an income account and corresponding costs in an expense account to offset them, there is no requirement to do so. You certainly need to record the occurrence of the expense, its invoicing, and the receipt for reimbursement. But which specific accounts are used to do that can vary, as long as you’re following a consistent process that accurately reflects position and performance.

That’s exactly what an expense claim accomplishes.

19

@lubos I am not entirely sure whether there is a bug with the program now, or whether there was a bug with the program a couple of years ago.

@Tut has explained, but I am still confused because there is a distinct difference between my Manager accounting records and HMRC records in April 2016 which means that in April 2016 quarter, what Manager showed then is not what it is showing today. It would appear that an update to Manager has definitely changed the VAT figures for that quarter. The discrepancy is based on the petrol and vat amount claimed.

Back in 2016, it would seem that manager recognised that I had overpaid, whereas in 2017 it is not recognising that I have overpaid Vat?

Second, my accountant seems to imply that Manager should be calculating the correct pay in the VAT Calculation worksheet. I may have misunderstood her email, because I do agree with @tut that the worksheet should be calculating the VAT figures for that quarter, not the Vat Balance outstanding.

I am using the UK VAT Calculation Worksheet which I believe has been modified by both you and myself a couple of years ago.

Can you investigate as I am concerned that there may be a bug in the UK VAT Calculation Worksheet. Thank you.

20

I will be meeting up with my accountant on the 18th May for a general meeting and also to cover this point. My accountant has given the figures to put in the VAT Calculation on HMRC Website and I have managed to get my VAT accounts to balance properly.

I still don’t understand what is going on. When I did the journal entry this year - it actually changed the figures in the VAT Calculation Worksheet which I am told was not supposed to happen!

We will go through it and then my accountant can say whether there is a bug or not. My accountant also stated that the Journal entry would not affect the VAT Worksheet.

So I am still of the opinion that there is a bug in the UK VAT Calculation Worksheet.