The VAT accounting scheme your business uses can have a big impact on the way you calculate and report VAT, and even affect cash flow. Some schemes do have eligibility restrictions, but as long as you meet their criteria you can register for VAT on a scheme to suit your particular needs.
The different requirements can be time consuming to wade through – especially if you’re not sure what schemes are available. We’ll give you a quick rundown. Don’t fall asleep.
Standard VAT accounting
The most common one, this is usually the VAT accounting scheme everyone uses when they give an example of how VAT works.
You’ll account for the VAT on everything you buy and sell, and either pay the difference between those two amounts if you collect more from customers than you pay on things you buy, or reclaim it (if it’s the other way round).
VAT Flat Rate Scheme
Sign up for the VAT Flat Rate Scheme (FRS) and you’ll pay your VAT bill as a percentage of your total turnover, rather than accounting for the VAT you collect and pay. The flat rate that applies to your business depends on the industry you are in, and the rate varies from sector to sector.
The flat rate scheme is also only open to businesses with an annual turnover of up to £150,000.
VAT cash accounting scheme
When you submit your VAT return, you’ll need to include information about transactions which happened during a particular period of time. The standard VAT scheme includes transactions based on their ‘tax point’, which means the date on the invoice you gave your customer or received from your supplier. You’ll need to pay HMRC for the VAT you charged on your sales, even if the customer hasn’t actually paid their bill.
Using the VAT cash accounting scheme means you account for VAT on the date the payment is made, so it’s about payments which have actually happened.
It can be particularly beneficial if you deal with customers who are notoriously bad at paying their invoices on time (because you won’t need to pay the VAT you ‘collect’ from them to HMRC until they actually pay it to you).
It’s maybe not so great if you buy a significant amount of things on credit (because you won’t be able to reclaim the VAT on your purchases until the transaction is complete and you’ve paid for everything)
Can I use VAT cash accounting?
Only if your business has an estimated taxable turnover of no more than £1.35 million. You can then remain in the scheme as long as your turnover stays below £1.6 million.
VAT annual accounting scheme
The VAT annual accounting scheme is very similar to standard VAT accounting but rather than making quarterly VAT submissions, you’ll submit on a yearly basis. The name was probably a big giveaway, so we didn’t bother with a spoiler alert.
Which businesses can join the annual accounting scheme?
Businesses can apply to join the annual accounting scheme if they:
- Expect taxable supplies to be less than £1,350,000 over the next twelve months.
- Are up-to-date with their VAT returns and are not able to register as a group of companies.
Applications to join the scheme are made using the form 600(AA). This is available on the Gov.uk website, or there’s a link in the VAT Notice 732. If your application is successful, HMRC will write to you.
Paying your bill on the VAT annual accounting scheme
The ‘annual’ bit only applies to submitting your VAT return to HMRC every year. Paying the bill is a different matter altogether.
You’ll need to make advance payments towards your VAT bill in a series of instalments across the year. Because you’re making payments before submitting this year’s return, the instalments will be based on your previous VAT submission – or an estimated amount if this is your first time.
Your advance payments can either be:
- Monthly instalments for nine months, starting in month 4 of the annual accounting period. Each instalment is 10% of the last year’s bill (or the estimated amount)
- Three instalments, due at the end of months 4, 7, and 10. Each instalment is 25% of the previous year’s liability
Sales tend to fluctuate from one year to the next, so you might need to make a balancing payment if the advance payments don’t cover what you owe once your return is submitted. Don’t panic, you can request a refund if the amount you paid across the year is higher than your final bill!
Retail and VAT margin schemes
VAT retail schemes are intended to simplify the way retail businesses work out the value of their taxable sales. Rather than working out the VAT for each individual sale, you just do it once with every VAT return instead.
In theory they’re open to everyone whose turnover is below £130 million (you’ll need to agree a tailor-made scheme with HMRC if your turnover is higher). In practice they’re usually used by businesses with a high volume of sales.
There are three standard VAT retail schemes:
- Point of Sale Scheme: This is where you identify and record the VAT at the time the sale is made.
- Apportionment Scheme: You buy goods and sell them on.
- Direct Calculation Scheme: Some of your sales are made at one VAT rate, while the rest of them (the majority) are made at another rate.
You can mix and match these with the Annual Accounting Scheme and Cash Accounting Scheme. Retail schemes cannot be used with the Flat Rate Scheme.
So, what are VAT margin schemes?
VAT margin schemes are aimed at businesses dealing in second-hand items, like artwork or antiques.
When your business buys something and then sells it on, a VAT margin scheme taxes the difference between these two amounts instead of the price you sold it for. The difference will attract a VAT rate of 16.67% (one-sixth).
You can choose to use a margin scheme when selling:
- Antiques
- Second-hand items
- Collectors’ items
- Art works
What can’t I use a margin scheme for?
Margin schemes can’t be used in relation to an item you bought and paid VAT on. This includes things like investment in gold, precious stones, or precious metals.
A margin scheme can be used at any time – it’s simply a case of recording and reporting your VAT correctly on your next VAT return. There’s no requirement to sign up specifically for the scheme and there’s no need to tell HMRC unless you’re asked.
What if some of the items I sell don’t qualify for a margin scheme?
If certain items you purchase and sell don’t qualify for a margin scheme, you must pay and charge standard VAT for those items in the usual way.
Further details can be found on the margin scheme page of the Gov.uk website.
Managing your VAT record keeping
Whichever scheme you decide on, it’s essential to understand how it will work with your business. It’s also very important to keep very good records of everything. Thanks to Making Tax Digital rules, VAT registered businesses must record this information digitally. We know quite a bit about that because we make software which makes it easier.
Learn more about using Pandle to make business accounting easier. Create a free account or use Pandle Pro for £6 a month.
