Thursday, 23 September 2010

Flat Rate VAT gotcha with Xero

If, like me, you're using the Xero accounting system to look after your books and you're on, or thinking about, the UK Flat Rate VAT scheme then I have some good news and bad news for you.

The good news is that Xero provides primary support for the Flat Rate VAT scheme in its VAT system - which is at least is better than nothing.

The bad news is that the setup is a bit of a hack and it doesn't do it properly. Specifically it doesn't set the VAT rate correctly on Revenue accounts.

The Flat Rate VAT scheme requires that you apply the percentage to all your turnover - including that which would normally be VAT exempt.

So if you have Interest Income from your bank, or other income that would normally be VAT exempt (such as Property income within a company) then the Xero Flat Rate VAT report will be wrong by default. What you have to do is go into the Chart of Accounts and manually change them from No Vat to the correct current VAT rate.

The line I got from Xero was "Where a business is becoming VAT Registered and moves on to the Flat Rate Scheme we'd recommend they ask advice from their accountant to help them set up the default VAT rates for accounts within their Chart of Accounts.". Which is frankly a slope shoulders excuse for not doing the job properly.