VAT is a complex area. With six different VAT schemes available, how you go about reclaiming VAT, and keeping your accounts in order, can be confusing – especially for new business owners.
Once you know if you need to register for VAT, you also need to know which scheme to register for.. To help you choose the best system for your business, we’ve pulled together this quick reference guide, comparing the positives and negatives of each unique VAT model.
The Standard Accounting method
If you reclaim VAT regularly then Standard VAT Accounting could be the best system for you. Based on a quarterly cycle, businesses complete four VAT returns per year and recoup VAT repayments every three months.
Positives
Quarterly VAT repayments
Negatives
Must file four returns per annum
You pay VAT even if your customer hasn’t paid yet
Annual VAT Accounting
Using Annual Accounting for your VAT allows you to make payments in either three quarterly, or nine monthly instalments. You only need to file one VAT return per year, but likewise you only receive a single repayment at the years’ end, so it’s not suited to businesses who prefer to recoup VAT repayments in regular intervals.
Positives
Only one VAT return required each year
Easier cash flow management
Offers flexibility in how frequently you pay
Negatives
Capped at taxable VAT turnover of £1.35 million
Only repays VAT once per annum (at the end of the year)
Payments may be higher than Standard Accounting
Cash VAT Accounting
If you’re looking to improve your cash flow, then Cash Accounting your VAT could be the answer. Under this scheme, businesses only pay VAT when they receive payments from customers. So, if your customer never pays, you won’t be held accountable for the VAT associated with that null payment (as long as you stick with the scheme). This means your business isn’t left out of pocket by payment delays or unfulfilled payments.
Positives
You only pay VAT when your customer has paid you
You never pay VAT on missed payments
Negatives
You can’t claim VAT on purchases until you pay the supplier
Repayments can take longer than standard accounting
You can’t claim VAT on business start-up purchases (tools, equipment etc.) until you’ve paid for them
If you leave the scheme, you’re liable to repay all outstanding VAT owed, including on any non-payments
The Flat Rate VAT Scheme
If your business generates an annual VAT taxable turnover of less than £150,000 you could use the Flat Rate scheme. Under the rules of this system, VAT is paid at a fixed percentage proportionate to your VAT inclusive turnover. The percentage you pay will depend on the nature of the business you are operating.
Using the Flat Rate VAT scheme can significantly lessen the amount of time your company spends calculating VAT. However, you cannot reclaim VAT on purchases you make.
Positives
A simple system for calculating VAT quickly
Businesses pay a fixed VAT rate, proportionate to taxable VAT turnover
You qualify for a 1% saving the first year you use the scheme
You don’t have to record how much VAT you charge on every sale
Negatives
You can’t claim VAT on purchases
The percentage you pay is dependant on your business type
The scheme is capped at taxable VAT turnover below £150,000
VAT Margin Schemes
The VAT Margin Scheme exists purely for businesses that deal in the exchange of second hand goods. Unlike other VAT schemes, in which you add VAT to sales and reclaim it on purchases, the margin system allows users to only pay VAT on any profit generated. This means you aren’t liable for VAT on transactions where you made a loss or broke even.
Positives
- VAT is calculated on your profit margin
- You only pay VAT on profitable transactions
- You can still use Standard VAT accounting for business overheads
Negatives
Only eligible businesses qualify for this scheme
- What constitutes a profit margin is subject to strict definition
VAT Retail Schemes
VAT Retail Schemes are perfect if your business makes lots of small value sales. Instead of calculating the VAT on every individual transaction, the Retail VAT Scheme allow you to work out a total for your VAT across a set sales period. There are a number of different accounting approaches accepted under the retail VAT umbrella, all of which can help retailers simplify and speed-up their VAT payments.
Positives
- Perfect for companies selling high volumes of products daily
- No need to record VAT on every single sale
- Several different schemes available
- Offers a simplified way to calculate VAT in retail businesses
Negatives
- Only applicable to retailers
- VAT registered customers may still request an invoice
- Calculations vary depending on the scheme you use
Have any questions?
While we hope this guide to the different VAT schemes may have helped shed a little light on the options available, we’re sure you’ll still have a lot of questions.
Here at ASfB, we’d be pleased to discuss your business with you and to help identify the most suitable VAT scheme. We work with startups and growing businesses, across a range of sectors, providing accounting, bookkeeping and business advisory services.
Call us on 01202 755600 or email hello@asfb-uk.co.uk.