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Value Added Tax (VAT) isn’t exactly one of those fun topics of chat on a night out, but unfortunately for business owners it’s a fact of life.

Once your taxable turnover goes above the VAT registration threshold (currently £85,000 a year), or you expect it to do so within the next 30 days, you must register for VAT. But did you know there’s more than just one VAT scheme you can sign up to? There are actually several, and it’s important to choose one that suits your business best.

Don’t forget, you can also decide to voluntarily register for VAT if doing so is beneficial to your business – even if the turnover your business makes is under £85,000 per year. It might sound a little crazy, but there are actually good reasons you may want to, which our team will be happy to chat to you about, or get an instant online quote.

What actually is VAT?

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

 

 

If you’re VAT-registered, you’ll need to submit returns to HMRC which show how much VAT you have charged. The return will also show how much VAT you have paid to your suppliers each time you make a purchase.

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 sales than you collect from your customers, you can reclaim the difference from HMRC.

What are the different types of VAT accounting schemes?

The way that VAT works can depend on which VAT scheme you register for. There are slightly different rules for some schemes, such as eligibility and reporting requirements.

Which VAT scheme should I use?

Choosing the right VAT accounting scheme for your purposes can make your VAT accounting much simpler, and can even help you improve cash flow in your business. It largely depends on how your business operates.

For example, if you usually pay more VAT on your purchases than you charge on sales, it can be useful for you to register for a scheme which allows you to make a VAT submission more frequently, so that you can claim the VAT back sooner.

 

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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.

The big advantage of standard accounting is that you can claim back VAT on purchases on the basis of the date on the invoice, rather than when you pay them. Unfortunately, this also works the other way, and the downside is that you’ll need to pay HMRC the VAT on all your sales invoices, 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.

Key facts about standard VAT accounting

What is the VAT Flat Rate Scheme?

The Flat Rate Scheme aims to make VAT accounting much simpler. Rather than working out the VAT on all your purchases and sales, you’ll work out the VAT you owe to HMRC as a percentage of your annual turnover.

It’s particularly popular with small businesses because it’s much easier to get the hang of, and there’s a bit less paperwork. The actual flat rate that you use for the calculation depends on your industry.

Because you pay the VAT to HMRC as a flat rate, you can simply keep the difference if you collect more VAT from customers than you need to pay. Having said that, operating VAT on the Flat Rate Scheme means you can’t reclaim the VAT that you pay on purchases, thought there are some exceptions for capital assets worth more than £2,000.

To use the VAT Flat Rate Scheme, you must be VAT registered, with a business turnover less than £150,000 (excluding VAT). Bear in mind too that there’s a 1% discount on the flat rate VAT if you use the scheme during your first year of being VAT registered.

Key facts about the VAT Flat Rate Scheme (FRS)

Key facts about the VAT Flat Rate Scheme

Limited cost trader

Some businesses that use the Flat Rate Scheme (FRS) must use a special rate – 16.5%. Known as limited cost traders, these businesses only buy a few goods, and the amount they spend on relevant goods is:

There are restrictions on the goods and services that 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?

Normally, VAT returns are based on the tax point date (which is typically the VAT invoice date) for your sales and purchases. The trouble with this method is that it can mean you need to pay HMRC the VAT on a sale when your customer hasn’t even paid you for it yet.

With VAT Cash Accounting it’s based on the payment date, not the invoice date. It means that you’ll only have to pay the VAT to HMRC once your clients pay their bill. 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.

You can only sign-up for VAT cash accounting if your estimated taxable turnover is £1.35 million or less, and only remain in the scheme if it stays below £1.6 million.

Key facts about the VAT Cash Accounting Scheme

 

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What is the VAT Annual Accounting Scheme?

VAT Annual Accounting, like the name suggests, means that you pay VAT on account, in either nine monthly or three quarterly instalments, and then submit a single, annual VAT return. 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.

You can only join the annual accounting scheme if your estimated taxable turnover is £1.35 million or less, and you can only remain in the scheme whilst your turnover stays below £1.6 million.

Key facts about the VAT Annual Accounting Scheme

Learn more about the VAT Annual Accounting Scheme.

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 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 simply need to keep a detailed record of eligible goods to be reported on their VAT return. The records should include invoices for each and every item, plus a stock record.

There are some exceptions to VAT margin schemes. These include investment in gold, precious metals and stone, and anything 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.

About The Author

Elizabeth Hughes

A content writer specialising in business, finance, software, and beyond. I'm a wordsmith with a penchant for puns and making complex subjects accessible. Learn more about Elizabeth.

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