The Different Types of VAT Accounting Schemes

If you need to register for VAT you might assume there’s only one way to manage it, but there are actually several VAT accounting schemes to choose from. Designed to meet the needs of a wide range of businesses, the type of VAT scheme you use can have a big impact on cash flow, admin, and your VAT bill, so it’s worth considering. In this article we’ll explain how some of the most commonly used VAT schemes work, and where to find more details.

What is VAT?

VAT is a sales tax which VAT-registered sellers must charge their customers based on the value of taxable services or goods they supply to them. In that respect, the trader acts a bit like a VAT collector, taking VAT from the customer as well as the sale price, and then paying the VAT element on to HMRC (which is why registering for VAT can have an impact on your sale price!).

Knowing when you need to become VAT registered

VAT registration is compulsory if your taxable turnover goes above the £90,000 VAT registration threshold in a 12-month period, or if you expect it to do so within the next 30 days. It’s crucial you keep good records so you know where you’re up to!

You can also decide to voluntarily register for VAT – even if your turnover is under the £90,000 threshold – if it’s beneficial. For some businesses this can actually be a tax efficient thing to do!

How VAT normally works

If you’re VAT-registered, you’ll need to submit VAT returns to HMRC. In most cases your return will show how much VAT you have charged, as well as how much VAT you paid to your suppliers on any purchases for the same time period.

• If you charge more VAT to customers than you pay to suppliers, you’ll need to pay the difference to HMRC as your VAT bill
• If you pay more VAT on the things you buy from your suppliers than you collect from your customers, you can reclaim the difference from HMRC

What are the different types of VAT accounting schemes?

There are different VAT schemes to choose from depending on what suits your needs and whether you’re eligible for the entry conditions. We’ll go over these in more detail, but the most common ones include:

• Standard VAT accounting scheme
• VAT Flat Rate Scheme
• VAT Cash Accounting Scheme
• VAT Annual Accounting Scheme
• VAT retail schemes
• VAT margin schemes

Which VAT scheme should I use?

Choosing the best VAT accounting scheme to suit your needs largely depends on how your business operates.

What is standard VAT accounting?

The most common method of accounting for VAT is to keep a record of the VAT on all your purchases and sales. You’ll account for the VAT on the basis of the tax point – this is the date that a transaction takes place for VAT purposes.

What to consider

The big advantage of standard accounting is that you can claim back the VAT you pay on purchases using the date on the invoice, rather than when you actually pay the bill. Unfortunately, this also works the other way though, so you’ll need to pay all your sales VAT to HMRC even if the customer hasn’t paid you. This can have implications for your cash flow.

In general, standard VAT accounting works well if you know your customers are prompt payers, or you receive immediate payments from shop sales or online.

What is the VAT Flat Rate Scheme?

The Flat Rate Scheme was created with the aim of making VAT accounting much simpler. Rather than calculating your bill by working out the difference between the VAT on all your purchases and sales, the VAT you owe to HMRC is simply a percentage of your annual turnover.

The flat rate percentage you need to use depends on your industry, with a 1% discount during your first year of being VAT registered. You can check the flat rate for your sector using the gov.uk website or with this online calculator.

What to consider

Because you pay the VAT to HMRC as a flat rate of your turnover, you can simply keep the difference if you collect more VAT from customers than you need to pay. This is great for businesses which charge VAT on pretty much everything, but have a relatively low flat rate.

Having said that, operating VAT on the Flat Rate Scheme means you can’t reclaim the VAT you pay on purchases, though there are some exceptions for capital assets worth more than £2,000.

It’s particularly popular with small businesses because it’s much easier to get the hang of, and there’s a bit less paperwork.

Limited cost trader

Some businesses using the Flat Rate Scheme (FRS) must use a special rate of 16.5% to work out their VAT bill rather than the standard flat rate for their industry. Known as limited cost traders, the rules will apply if the amount you spend on goods is:

• Less than 2% of your turnover
• Or more than 2%, but less than £1,000 per year

There are restrictions on the goods and services you can include in this calculation when deciding if you qualify to remain on a lower rate. For example, some business expenses, such as professional services, capital expenditure, and vehicle running costs, are not eligible.

What is the VAT Cash Accounting Scheme?

With most schemes, you’ll include transactions in your VAT return based on their tax point date (the date shown on the VAT invoice). The trouble with this method is that you’ll need to pay HMRC the VAT on a sale even if your customer hasn’t paid you for it yet.

With VAT Cash Accounting the calculation is based on the payment date, not the invoice date, meaning you’ll only have to pay the VAT to HMRC once your clients pay their bills. Just keep in mind that it works the other way, too; you’ll only be able to reclaim VAT on a purchase once you pay your supplier.

It makes it particularly crucial to keep squeaky clean VAT records which include the actual date of payment, as well as the invoice date.

What is the VAT Annual Accounting Scheme?

With the VAT Annual Accounting scheme you’ll make advance payments towards your bill throughout the year (either 9 instalments on a monthly basis, or 3 payments on a quarterly basis), and then submit a single VAT return at the end of the 12 month period. If you’ve overpaid, you’ll be able to request a refund.

The upside is that it keeps things much simpler, but it does mean you’ll only be able to reclaim VAT on an annual basis. This might be a problem for businesses which usually reclaim VAT, rather than incurring a bill.

VAT retail schemes

VAT retail schemes can also simplify VAT though there are a number of them to choose from. The right scheme for your business depends on how you operate, and what your retail turnover (excluding VAT) is. For instance, you can only use the Point-of-Sale Scheme if you identify and record VAT at the point that you make a sale, whereas the Apportionment Scheme is available if you buy goods for resale.

In some cases you can combine the retail scheme with the Cash Accounting Scheme or the Annual Accounting Scheme. Add to that the separate rules for caterers, pharmacists and florists, and the whole thing gets a bit confusing! We’re more than happy to help.

What are VAT margin schemes?

VAT margin schemes can be used by business owners who sell second-hand goods, works of art, antiques, and other collectors’ items. The scheme taxes the difference between what a business has paid for an item and how much it sold it for (instead of taxing the full selling price).

To join a VAT margin scheme business owners need to keep a detailed record of the goods eligible to be reported on their VAT return. These records should include invoices for every item, plus a stock record.

There are some exceptions to VAT margin schemes. These include investment in gold, precious metals and stone, and any purchases for which you were charged VAT. There are also special conditions with regard to things like auctions, second-hand vehicles, horses and ponies, and pawnbrokers.

Don’t forget, you’re also welcome to contact our team for advice, plus find out more about our online accounting services. Call 020 3355 4047 or get an instant online quote.