Table of contents
Table of contents
Choosing a VAT scheme is a big decision, but the good news is you don’t have to stay locked in using the same one indefinitely.
As your business grows and circumstances change, you may find you need to switch over to an entirely different scheme. In this article we’ll recap the VAT basics and then cover what steps you’ll need to take if you’re moving from one VAT scheme to another.
VAT is simply a sales tax which VAT-registered sellers must charge their customers based on the value of the taxable services or goods they supply to them.
In this sense, you can think of yourself as a kind of VAT collector, taking VAT from your customers and then paying it on to HMRC.
VAT registration is compulsory if your taxable turnover exceeds the £90,000 threshold in any 12-month period, or if you expect to do so within the next 30 days.
You can also choose to voluntarily register for VAT – even if your turnover is under the £90,000 threshold – and this can actually help you be more tax-efficient.
As a VAT registered businesses you’ll need to send VAT returns which show how much VAT you’ve charged on your own sales, as well as how much you paid to your suppliers in the same time period.
There are a number of different VAT schemes to choose from, depending on your own unique situation and whether you meet the entry conditions.
Some of the most common ones include:
Again, this will be different for everyone and largely depends on how your business operates.
Well, if you’re someone who tends to pay more VAT than you charge (meaning you normally need to reclaim VAT on your return), then you’ll want to choose a scheme that includes frequent VAT returns, as this way you won’t need to wait too long to claim back what you’re owed.
Choosing the most appropriate VAT scheme at the outset means you can avoid the cost and hassle of having to switch later, but this can change over time. Which deftly brings us to our next question and answer. Honestly, we should do this for a living.
Yes, you can usually move to a different VAT accounting scheme, as long as you meet the eligibility criteria.
This could be because of a change in circumstances, or because the business is no longer eligible for its current VAT scheme.
For example, some businesses need to change schemes once they reach a certain income threshold.
You might do a spot of research and decide an alternative scheme may simply prove more beneficial, helping you to be more tax efficient. Our online VAT calculator compares the standard and Flat Rate schemes as an example.
Under HMRC rules, a business can only change its VAT scheme at the start of a new accounting period, and so it’s recommended that you don’t do anything until you’ve completed your final VAT return for the previous scheme.
There’s no strict minimum time you have to stay enrolled in a VAT scheme, with you being free to leave whenever you like.
If you choose to leave the Flat Rate Scheme, however, you are required to wait 12 months before rejoining.
Generally speaking, you should aim to change schemes at a month or quarter end, after reconciling the VAT on your previous scheme.
Most people don’t realise that switching to a new VAT scheme is about more than just notifying HMRC, though.
You might have to change your whole process for keeping VAT records, etc., as different schemes have different requirements.
If you wanted to switch from Accrual Accounting to Cash Accounting, you would have to start including all sales and purchases – even if they’d not yet been paid.
It’s important to note that any errors on your VAT return could lead to penalties, and so businesses need to be particularly vigilant during the changeover to make sure every single transaction and scrap of VAT is accounted for properly.
So it seems like a good time to mention that Pandle is free MTD-compliant accounting software, helping you to minimise the risk of errors in your VAT return – and much more besides.
Switching VAT schemes can also impact your cash flow (both positively and negatively).
For example, if you’re someone who normally needs to reclaim VAT, and you switch to a scheme with longer gaps between VAT returns, then you’ll have to make do with less free-flowing cash than normal.
First and foremost, you’ll want to check your eligibility for the new scheme you want to switch to (e.g. your annual turnover must be £1.35 million or less if you want to join the VAT Annual Accounting Scheme).
The next order of business should be preparing for the changeover, which means finalising your previous returns and making sure your current software of choice is set up and ready to go so you can keep detailed records.
Lastly, you’ll need to inform HMRC via your online tax account. Alternatively, you can save yourself the headache and hire an accountant to complete the process on your behalf, as this way you don’t have to worry about getting things wrong.
No, your VAT number won’t change if you switch from one type of VAT accounting scheme to another, so your registration number will stay the same.
Learn more about using Pandle to make business accounting easier. Create an account today and decide what to do with all the extra time you get back.
A content writer who enjoys writing in a way that’s fun and engaging, while still being informative and useful to everyday people. I also enjoy writing creatively.
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