Which VAT scheme should I use?

HMRC Tax VAT

A business must register for VAT if their vat taxable turnover exceeds £85,000 but are you aware that there are several VAT schemes that may be available for your business to use and some may give your business a cash advantage.

 

What is a Standard VAT Scheme

A standard VAT return is prepared as follows: –

VAT on sales invoices (known as Output Tax)

LESS

VAT on purchase invoices (Known as Input Tax)

=

Amount payable/reclaimable to/from HMRC

 

What other VAT schemes are there?

 

Other VAT schemes available include Cash Accounting, the Flat Rate Scheme and Annual Accounting

 

Cash Accounting

What makes cash accounting different to standard accounting is that rather than using sales and purchase invoices, you use receipts and payments.  The advantage of this is, you will not have to pay vat over on an invoice that you have raised in the period, but have not yet been paid for. The same applies for purchases, you cannot reclaim VAT on a purchase invoice, if you have not yet paid for it.

This scheme can give a cash flow advantage to businesses as VAT is not paid until you have received the money.

To qualify to join the Cash Accounting scheme your VAT taxable turnover must be under £1.35 million

 

Flat Rate Scheme

On the Flat Rate Scheme the VAT you pay is a percentage of your gross turnover.  The rate payable varies for different industries and a list of these can be found on HMRC website.  The rate payable is lower than the standard rate of VAT to take in to account that VAT is not claimed back on purchases unless you spend > £2,000 on a single capital purchase.

To join the Flat Rate Scheme your turnover must be below £150,000 excluding VAT.

If you have limited purchases, defined as less than 2% of that quarters VAT inclusive sales, you are a Limited Cost Trader.  Your VAT rate will therefore be 16.5% of your gross turnover, which is effectively the same as 20% VAT on a net sale.

The benefit of the Flat Rate Scheme is that it makes your bookkeeping easier, as you only need your gross turnover to prepare your return.

 

Annual Accounting

Under annual accounting, you make equal payments on account, each month or quarter, based on your last VAT return.  You then submit one VAT return per year.  When submitting your return, you either make a balancing payment amounting to the VAT due, less the payments on account, or you claim any refund due.

You can only join the scheme if your VAT taxable turnover is less that £1.35 million.

This scheme would not be suitable for a business that gets regular VAT refunds from HMRC.

The advantages of this scheme are the reduced number of returns to be filed and it can help with cash flow as you know your monthly payments.

 

Others

There are several other VAT schemes but most of them relate to specific business sectors such as the retailers scheme, or the margin scheme for second hand goods.

One scheme to be aware of is the Partial exemption scheme.  If you make any exempt sales in the vat period, you may be caught under this scheme.

If you would like any further information regarding VAT or the schemes available, please contact us or call the office on 0161 236 7677