VAT : Choosing the right scheme for your business
There are several different ways you can account for VAT that could save you time and money and improve cashflow. Some of these VAT accounting schemes have been designed for specific trade sectors. Others have been designed to deal for general businesses. Some of the schemes can be used together.
This guide provides an overview of the schemes. Choosing the right scheme is dependent on your specific business and your needs. We will be pleased to advise free of charge to help you make the right choice..
Using standard VAT accounting, you must complete four VAT Returns each year. Any VAT due is payable quarterly, and any VAT refunds due to you are also repayable quarterly. You pay VAT on your sales whether or not your customer has paid you.
You can use the Annual Accounting Scheme if your estimated VAT taxable turnover during the next tax year is not more than £1.35 million. If you are already using Annual Accounting you can continue to do so until your estimated VAT taxable turnover exceeds £1.6 million.
With the Annual Accounting Scheme, you pay VAT on account in nine monthly or three quarterly instalments. These instalments are based on the VAT you paid in the previous year. If you have been trading for less than a year, the instalments are based on an estimate of your VAT liability.
You only need to complete one VAT return at the end of the year. If you have not paid enough VAT on account you must make a balancing payment. If you have overpaid, you claim a refund from HMRC.
Annual Accounting can reduce your paperwork because you only need to complete one annual VAT return instead of four quarterly VAT returns. It can also make it easier to manage your cashflow. However, you still have to keep all required VAT records and accounts.
Annual Accounting is not suitable for businesses that regularly reclaim VAT as you would only get one repayment at the end of the year.
A disadvantage of Annual Accounting is that if your turnover decreases, your interim payments may be higher than under the standard VAT accounting.
Using cash accounting may help your cash flow, especially if your customers are slow payers. You do not need to pay VAT until you have received payment from your customers. If a customer never pays you, then you don't have to pay VAT on that bad debt as long as you continue to use the Cash Accounting Scheme.
You reclaim VAT on your purchases when you have paid your suppliers.
You can use cash accounting if your estimated VAT-taxable turnover during the next tax year is not more than £1.35 million. You can continue to use cash accounting until your VAT taxable turnover exceeds £1.6 million.
Dependant on your circumstances, there may be some disadvantages to using cash accounting:
- You cannot reclaim VAT on your purchases until you have paid your suppliers. This can be a disadvantage if you buy most of your goods and services on credit.
- If you regularly reclaim more VAT than you pay, you will usually receive your repayment later under cash accounting than under standard VAT accounting, unless you pay for everything at the time of purchase.
- If you start using cash accounting when you start trading, you will not be able to reclaim VAT on most start up expenditure, such as initial stock, tools or machinery, until you have actually paid for those items.
- If you leave the Cash Accounting Scheme you will have to account for all outstanding VAT due, including any bad debts.
Flat Rate Scheme
If your VAT taxable turnover is less than £150,000, you could simplify your VAT accounting by using the Flat Rate Scheme. Using this scheme, you pay VAT as a fixed percentage of your VAT inclusive turnover. The actual percentage you use depends on your type of business.
Although you cannot reclaim VAT on purchases (it is taken into account in calculating the flat rate percentage) the Flat Rate Scheme can reduce the time taken on accounting for and working out your VAT.
You still need to show a VAT amount on each sales invoice, but you don't need to record how much VAT you charge on every sale in your accounts. Nor do you need to record the VAT you pay on every purchase.
If you register for the Flat Rate Scheme in your first year of VAT registration, you can take advantage of a 1 per cent reduction in your flat rate percentage.
There are other advantages too:
- Fewer rules to follow. You no longer have to work out what VAT on purchases you can and can't reclaim.
- Peace of mind. With less chance of mistakes, you have fewer worries about getting your VAT right.
- Certainty. You always know what percentage of your takings you will have to pay to HM Revenue & Customs
The flat rate percentages take into account zero-rated and exempt sales. They also contain an allowance for the VAT you spend on your purchases. So the VAT Flat Rate Scheme might not be right for your business if:
- you buy mostly standard-rated items, as you cannot generally reclaim any VAT on your purchases
- you regularly receive a VAT repayment under standard VAT accounting
- you make a lot of zero-rated or exempt sales
VAT margin schemes for second-hand goods, art, antiques etc
Normally you charge VAT on your sales, and reclaim VAT on your purchases. However, if you sell second-hand goods, works of art, antiques or collectibles, there may have been no VAT for you to reclaim when you bought them. You may be able to use a VAT margin scheme.
This enables you to account for VAT only on the difference between the price you paid for an item and the price at which you sell it - your margin. You won't pay any VAT if you don't make a profit on a deal.
You can still use standard VAT accounting for other sales and purchases such as overheads. Using standard VAT accounting, you charge VAT on your selling price and reclaim VAT on the price of your purchases. This means that you only pay VAT on the value you added to the item you sold, that is, the difference between how much you paid for the item and how much you sold it for.
There are specific rules for defining what the margin is, and there are limits on the types of goods which are eligible for the scheme.
VAT retail schemes
If you sell to the general public, especially high quantities of relatively inexpensive items, it can be difficult, time-consuming and costly to record the VAT on every individual sale in your accounts.
There are several VAT accounting schemes that retailers can use instead of accounting for VAT in the standard way. These can help simplify your retail VAT accounting.
There are a number of different standard retail schemes, or, depending on your business, you may be able to agree a bespoke VAT retail scheme with HM Revenue & Customs. If your turnover is over certain limits, you can only use a bespoke scheme.
With the VAT retail schemes, you:
- work out the value of your total VAT taxable sales for a period - for example, a day
- work out the proportions of that total that are taxable at different rates of VAT (standard, reduced and zero) - these will vary according to the scheme you are using
- apply the appropriate VAT fraction to that sales figure to calculate your VAT due
You can only use the retail scheme for supplies that you make by way of retail, and you must still issue a VAT invoice to any VAT-registered customer who requests one. Any scheme you choose must, in the opinion of HM Revenue & Customs, give a fair and reasonable result in the amount of VAT paid.