The VAT accounting scheme that you use can simplify how you work out your VAT, and even enhance your cash flow. Some schemes do have eligibility restrictions, but as long as you meet the criteria you can register for VAT on a scheme to suit your particular needs.
In this article we give an overview of the different types of VAT schemes available, to help you decide which VAT scheme is the best fit for your business.
VAT Flat Rate Scheme
The VAT Flat Rate Scheme has been around since 2002 and is aimed at smaller businesses and small limited companies. You’ll still charge VAT to your customers as normal, but rather than paying or claiming the difference with HMRC, your VAT bill will be a percentage of your total turnover.
The percentage is a flat rate depending on the industry your business is in. It might be much lower than the VAT that you charge to customers on sales, and you can simply keep the difference. For instance, a printing business pays a flat rate of 8.5%, but might charge customers 20%.
The rate that you pay to HMRC also depends on whether or not you’re a ‘limited cost business’.
What is a limited cost business?
A limited cost business is one which only spends a small amount on the cost of goods sold; either less than £1,000 per year, or less than 2% of your turnover.
If you’re not considered a limited cost business, then the flat rate is worked out based on which industry you work in e.g., agriculture, or accountancy.
Most contractors that sell their personal services to customers will usually be limited cost traders because they don’t have goods they can resell repeatedly.
Is my business eligible for the VAT Flat Rate Scheme?
| Your business will qualify for the VAT Flat Rate Scheme | Your business will need to withdraw from the VAT Flat Rate Scheme |
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Don’t forget, if the turnover of your business drops to below £83,000, you may decide to withdraw your VAT registration altogether.
Even if your business is eligible for VAT FRS, it might not be the best type of scheme for you. If you register for VAT FRS you won’t be able to reclaim the VAT on your purchases.
Normally a business which spends more on VAT than it charges to its customers can reclaim the difference. On this scheme you can only reclaim VAT on capital assets (such as equipment) over £2,000 or more.
VAT cash accounting scheme
VAT returns are usually based on the tax point date (which generally is the same as the VAT invoice date) relating to your sales and purchases. This can sometimes mean you end up paying HMRC for the VAT due on sales that haven’t yet been paid for by your customers.
The beauty of the VAT cash accounting scheme is that it bases the return on payment dates for sales and purchases, not invoice dates. So, it’s about payments that have occurred, not those which will occur.
The disadvantage however is that you cannot claim back VAT on any purchases which have not been paid for by your business in the VAT quarter, regardless of invoice date.
Is my business eligible for the VAT cash accounting scheme?
Only if it 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.
Retail and VAT margin schemes
If you have sold goods inclusive of VAT, you need to deduct the VAT recorded in your VAT account. If your goods were sold exclusive of VAT, then the VAT needs to be added to your account.
VAT retail schemes are helpful in making your calculations for VAT that bit easier. Rather than working out the VAT for each individual sale, you just do it once with every VAT return instead.
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: This is where you buy goods and sell them on.
- Direct Calculation Scheme: This is where some of your sales are made at one VAT rate, while the rest of them (the majority) are made at another rate.
If your turnover (excluding VAT) is more than £130 million you must work with HMRC to agree a tailor-made retail scheme your business can use. It is possible to use a retail VAT scheme in conjunction with the Annual Accounting Scheme and the Cash Accounting Scheme. However, retail schemes cannot be used together with the Flat Rate Scheme.
So, what are VAT margin schemes?
VAT margin schemes are aimed at businesses dealing in second-hand items, including artwork or antiques, where purchases are charged without VAT, but as a VAT registered business selling it on, you must charge it. There is also a special tour operators’ margin scheme.
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.
What can’t I include?
You can’t include any of the following in your calculations when using a margin scheme:
- Business overheads
- Accessories or parts
- Repairs
Instead, you will need to reclaim these on your VAT return as you usually would.
Further details can be found on the margin scheme page of the Gov.uk website.
Annual accounting scheme
The big benefit of the annual accounting scheme is that it allows small businesses to submit only one VAT return each year, rather than the usual four. The bill is paid in instalments throughout the year, based on what your estimated VAT liability is, or on previous VAT returns. You might need to pay a balancing payment when you submit your VAT return.
It’s particularly handy for small businesses, as it not only reduces paperwork but also helps with budgeting and cash flow.
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.
How do I pay the VAT if I use the annual accounting scheme?
Businesses that have been signed up for at least twelve months will pay their VAT in nine monthly instalments. Each instalment will equate to 10% of the last year’s liability. Instalments must be paid at the end of months 4 to 12 of the current annual accounting period.
There is an alternative to this however, where you can pay your VAT in three instalments instead. Each instalment is 25% of the previous year’s liability and is due at the end of months 4, 7, and 10.
Managing your VAT record keeping
Whichever scheme you decide on, it’s essential to understand how it will work with your business. This is where Pandle’s range of forecasting and reporting features can help.
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