Handling VAT / Sales tax account

So i am operating a sole proprietor business in the UK. I have to collect sales tax from my customers, and can claim sales tax back from expenses. What is the best way to handle this?

- 1) create a dummy checking account called “sales tax”, and use a split transaction to transfer some of the invoice or expense to this account?

- 2) create a dummy credit card account and do the same thing?

- 3) create a category called sales tax and use a split transaction

I’d prefer to not show the funds as income as they aren’t a true income (I.e. I collect it on behalf of the government). that would be a problem with option 3.

 

thanks!

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  • Hello, Sea Green Commander !

    I also have a side business where I deal with both of these things, and I would definitely go with #3. Inflow transactions categorized as anything other than Inflow: To be Budgeted do not count as income in your YNAB reports, so you don't need to worry about that!

    For expenses, I would use color flags—no need to fuss with a budget category at all. When you submit your tax return, you can quickly search for the flag color you used for tax-refundable expenses, and total them up.

    Please let us know if you still have questions!

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  • Thanks! Trouble is with using a category that sometimes the amount is negative, and then disappears when the month rolls over. Also with an expense it’s not a tax deduction. 20% of the amount I paid for those expenses is summed up with the 20% sales tax collected on earnings leaving a balance. I think a dummy tracking account still seems like a better solution to me?

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  • Let me talk this through a little and make sure I understand.

    When you make a retail sale, some of the amount you collect is sales tax that needs to be submitted to the tax authority. You'll want to track that and have that amount available in a category in your budget, ready to submit.

    When you make a business purchase, you pay VAT on it, but that VAT is refundable, and this reduces the amount of sales tax you owe in a given quarter (or whatever the tax reporting period is), right?

    In that case, I still don't think a tracking account is the best way to do this. Here's what I would do.

    Create a category called Sales Tax. Budget a little money to it to get started, and make a note on the category saying how much you put in—you'll see why in a minute.

    When you make a retail sale, enter a split transaction, and send the proper portion of the incoming money to the Sales Tax category.

    When you make a retail purchase where the VAT is refundable, enter a split transaction, and categorize the VAT portion to the Sales Tax category.

    Now, at the end of the quarter, take the amount available in the Sales Tax category, and subtract the amount you "seeded" the category with. That's how much you currently owe. You can confirm this by looking at the Income v Expense report. The total inflow for the Sales Tax category is the amount you owe. In either case, if the amount is negative, that means you're due a refund.

    Why do you have to seed the category?

    To avoid overspending in the case where your outstanding refundable VAT is larger than your sales tax receipts at a given time. You can't tell a Vendor, "I'm not going to pay the VAT on this because it's going to be refunded later," and you can't tell you budget that, either!

    (I mean, okay, in the US you actually can tell a vendor that, using a Reseller Permit, but I don't know how it works in the UK!)

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  • Yes, you have it right - thanks!

    And, the presence of the 'seed' amount in the category I presume then prevents the category ever going negative I presume. If I have more purchases than sales in a given month I am owed a refund, but my cashflow is protected because that seed amount shouldn't ever let the category fall below zero. Do I understand correctly?

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      Sea Green Commander Yes. And that means if the category Available ever goes negative, you need to move money into the category to increase the seed amount. Keep track then of that new seed amount. To keep track of the seed amount, either use the category notes or put it in the name of the category.

      Alternatively, if your category Available always stays positive by too much of a margin, you can move money out of the category to reduce the seed amount.

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    • Sea Green Commander I'm really glad that helped, because I just read over my post from four days ago and I feel like someone else who knows a lot more about sales tax wrote it!

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