There are a number of VAT schemes available, two of which are intended to help businesses improve cash flow and save time: VAT Cash Accounting and the VAT Flat Rate Scheme. But what are they and which is best for your business?
In this article, we’ll review the benefits of both and outline which businesses each is most suited to.
VAT Cash Accounting v VAT Flat Scheme
We have summed up the benefits and eligibility criteria of both schemes in the table below. Just remember, you are only able to use one scheme at any one time.
Comparing VAT Cash Accounting to VAT FRS
|VAT Cash Accounting||VAT Flat Rate Scheme|
|Pay VAT on sales when your customers pay||Pay a fixed rate of VAT regardless of when customers pay|
|Reclaim VAT on purchases once you’ve paid your supplier||Keep the difference between what you charge customers and pay to HMRC|
|To join, your VAT turnover must be £1.35 million or less||To join, you need to have a VAT turnover of £150,000 or less|
VAT Cash Accounting
VAT Cash Accounting is a great option for businesses with a higher turnover that want to maximise cash flow. Providing that your VAT taxable turnover is £1.35 million or less and you are VAT registered, this could be the scheme for you.
One of the main benefits of VAT cash accounting is the ability to delay VAT payments until you are paid by your customers. This is particularly useful if you make use of an invoicing system with stipulated payment terms, for example. It also means that in the event that a customer doesn’t pay you, you won’t need to pay VAT on that purchase.
With Cash Accounting, you will need to pay your suppliers first before you can claim back any VAT paid.
Be mindful that as soon as your business turns over more than £1.35 million, you will no longer be eligible to benefit from the scheme.
VAT Flat Scheme
If your business has a taxable turnover £150,000 or less and you are VAT registered, then the VAT Flat Scheme might be best suited to you. With the VAT Flat Scheme, you’ll pay a fixed VAT flat rate calculated dependent on your business type. You’ll also get a 1% discount in your first year as a VAT registered business.
This scheme aims to simplify VAT for smaller businesses; you pay one flat rate of VAT and don’t need to record how much you VAT you charge.
Completing VAT returns
Regardless of which scheme you decide to use for your business, since 1 April 2019 all businesses turning over £85,000 or more per year need to use digital bookkeeping and submit VAT returns using HMRC recognised software.
This is the first scheme launched under HMRC’s Making Tax Digital (MTD) initiative. It’s designed to make tax returns simpler and more efficient.
Find out more about how Pandle is one of the recognised MTD software providers, with our free accounting software designed for straightforward and intuitive bookkeeping .