There are a number of ways to account for VAT. While standard VAT accounting is used by many firms, small business owners may wish to consider the alternative schemes that are available. Choosing the most suitable option could save you a considerable amount of time and money.
Annual accounting scheme
Under the annual accounting scheme, businesses are only required to submit one VAT return per year. During the year, agreed monthly or quarterly payments are made based on an estimated liability for the year, with a balancing payment due with the return.
The scheme is available for most businesses that expect to have an annual tax-exclusive turnover of not more than £1,350,000. These businesses can join the scheme from the date they register for VAT. A business can leave the scheme voluntarily at any time by writing to HMRC, but it must leave once its annual taxable turnover exceeds £1,600,000.
Submitting only one VAT return each year (rather than the four required under standard VAT accounting) could save a considerable amount of time and paperwork
It may be easier to manage cashflow as the liability to be paid each month is known and certain
There is an extra month to complete the VAT return and pay any outstanding tax
As interim payments are based on the previous year they may be higher than necessary, although it is possible to adjust these if the difference is significant
Cash accounting scheme
The cash accounting scheme enables businesses to account for VAT on the basis of cash received and paid, rather than on tax invoices issued and received. A business can join the scheme if there are reasonable grounds to believe that its annual turnover is not expected to exceed £1,350,000 in the next twelve months.
As output tax (VAT charged by the business on its sales) is not due until payment of sales invoices is received, there may be a cashflow advantage. This is particularly beneficial for businesses with slow-paying customers
There is automatic relief for bad debts: if a customer fails to pay then no output tax will be due
Input tax (VAT suffered on the goods and services purchased) cannot be recovered until suppliers’ invoices are paid
Flat rate scheme
Under the flat rate scheme, the VAT due is calculated by applying a predetermined flat rate percentage (dictated by the trade sector), to the business turnover of the VAT period. The current trade sector rates range from 4% to 14.5%. There is a further 1% reduction on the normal rates for businesses in their first year of VAT registration. On 1 April 2017 the government introduced a new 16.5% rate for businesses with limited costs, such as many labour-only businesses. Following this, those using the flat rate scheme will need to decide if they are a ‘limited cost trader’ – please contact us if you would like assistance with this matter.
The flat rate scheme is only available to businesses that expect their VAT exclusive turnover in the next twelve months to be no more than £150,000 in taxable supplies. Businesses must leave the scheme when income in the last twelve months exceeds £230,000, unless this is due to a one-off transaction and income will fall below £191,500 in the following year. A business must also leave the scheme if there are reasonable grounds to believe that total income is likely to exceed £230,000 in the next 30 days.
It saves time and simplifies record-keeping by removing the need to work out and record output and input tax when calculating the VAT due to HMRC
The predetermined fixed-rate percentages are lower than the standard VAT rate
Turnover needs to be under £150,000
Businesses that use the scheme cannot normally recover input tax or VAT on imports or acquisitions
The scheme can be complex where a business buys and sells goods and/or services from outside the UK
There are also special schemes for retailers, as it is impractical for most retailers to maintain all the records required of a registered trader. The three standard VAT retail schemes are: the Point of Sale Scheme; the Apportionment Scheme; and the Direct Calculation Scheme. For more information and advice on these and the schemes available to certain other trades, please do contact us.
This article is intended as a basic introduction to some of the key VAT schemes. We can advise you on the most suitable option for your business.